Item 1. Condensed Consolidated Financial
Statements
ShiftPixy, Inc.
Condensed Consolidated Balance Sheets
|
|
May 31,
2020
|
|
|
August 31,
2019
|
|
|
|
(Unaudited)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
10,835,000
|
|
|
$
|
1,561,000
|
|
Accounts receivable, net
|
|
|
179,000
|
|
|
|
86,000
|
|
Unbilled accounts receivable
|
|
|
2,133,000
|
|
|
|
1,137,000
|
|
Note receivable, current portion
|
|
|
1,291,000
|
|
|
|
-
|
|
Deposit – workers’ compensation
|
|
|
473,000
|
|
|
|
235,000
|
|
Prepaid expenses
|
|
|
295,000
|
|
|
|
349,000
|
|
Other current assets
|
|
|
190,000
|
|
|
|
244,000
|
|
Current assets of discontinued operations
|
|
|
2,386,000
|
|
|
|
10,419,000
|
|
Total current assets
|
|
|
17,782,000
|
|
|
|
14,031,000
|
|
|
|
|
|
|
|
|
|
|
Fixed assets, net
|
|
|
2,382,000
|
|
|
|
3,320,000
|
|
Note receivable, net
|
|
|
5,108,000
|
|
|
|
-
|
|
Deposits – workers’ compensation
|
|
|
347,000
|
|
|
|
754,000
|
|
Deposits and other assets
|
|
|
140,000
|
|
|
|
124,000
|
|
Non current assets of discontinued operations
|
|
|
1,749,000
|
|
|
|
5,567,000
|
|
Total assets
|
|
$
|
27,508,000
|
|
|
$
|
23,796,000
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and other accrued liabilities
|
|
$
|
2,823,000
|
|
|
$
|
4,455,000
|
|
Payroll related liabilities
|
|
|
8,704,000
|
|
|
|
8,533,000
|
|
Convertible notes, net
|
|
|
-
|
|
|
|
3,351,000
|
|
Accrued workers’ compensation costs
|
|
|
473,000
|
|
|
|
235,000
|
|
Default penalties accrual
|
|
|
-
|
|
|
|
1,800,000
|
|
Derivative liability
|
|
|
-
|
|
|
|
3,756,000
|
|
Current liabilities of discontinued operations
|
|
|
2,386,000
|
|
|
|
10,058,000
|
|
Total current liabilities
|
|
|
14,386,000
|
|
|
|
32,188,000
|
|
Non-current liabilities
|
|
|
|
|
|
|
|
|
Accrued workers’ compensation costs
|
|
|
1,098,000
|
|
|
|
525,000
|
|
Non-current liabilities of discontinued operations
|
|
|
5,533,000
|
|
|
|
3,853,000
|
|
Total liabilities
|
|
|
21,017,000
|
|
|
|
36,566,000
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders’ equity (deficit)
|
|
|
|
|
|
|
|
|
Preferred stock, 50,000,000 authorized shares; $0.0001 par value
|
|
|
-
|
|
|
|
-
|
|
Common stock, 750,000,000 authorized shares; $0.0001 par value; 3,857,316 and 909,222 shares issued as of May 31, 2020 and August 31, 2019
|
|
|
-
|
|
|
|
-
|
|
Additional paid-in capital
|
|
|
117,730,000
|
|
|
|
32,505,000
|
|
Treasury stock, at cost-0 and 13,953 shares as of May 31, 2020 and August 31, 2019
|
|
|
-
|
|
|
|
(325,000
|
)
|
Accumulated deficit
|
|
|
(111,239,000
|
)
|
|
|
(44,950,000
|
)
|
Total stockholders’ equity (deficit)
|
|
|
6,491,000
|
|
|
|
(12,770,000
|
)
|
Total liabilities and stockholders’ equity (deficit)
|
|
$
|
27,508,000
|
|
|
$
|
23,796,000
|
|
See accompanying notes to the unaudited
interim condensed consolidated financial statements.
ShiftPixy Inc.
Condensed Consolidated Statements of
Operations
(Unaudited)
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
May 31, 2020
|
|
|
May 31, 2019
|
|
|
May 31, 2020
|
|
|
May 31, 2019
|
|
Revenues (gross billings of $14.4 million and $11.9 million less worksite employee payroll cost of $12.4 million and $10.3 million, respectively for the three months ended; gross billings of $47.0 million and $25.9 million less worksite employee payroll cost of $40.3 million and $22.3 million, respectively for nine months ended)
|
|
$
|
2,014,000
|
|
|
$
|
1,638,000
|
|
|
$
|
6,775,000
|
|
|
$
|
3,658,000
|
|
Cost of revenue
|
|
|
1,873,000
|
|
|
|
1,467,000
|
|
|
|
6,051,000
|
|
|
|
3,126,000
|
|
Gross profit
|
|
|
141,000
|
|
|
|
171,000
|
|
|
|
724,000
|
|
|
|
532,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages, and payroll taxes
|
|
|
1,793,000
|
|
|
|
1,152,000
|
|
|
|
5,246,000
|
|
|
|
3,182,000
|
|
Stock-based compensation – general and administrative
|
|
|
150,000
|
|
|
|
(5,000
|
)
|
|
|
895,000
|
|
|
|
154,000
|
|
Commissions
|
|
|
27,000
|
|
|
|
64,000
|
|
|
|
137,000
|
|
|
|
130,000
|
|
Professional fees
|
|
|
439,000
|
|
|
|
1,280,000
|
|
|
|
2,276,000
|
|
|
|
2,799,000
|
|
Software development
|
|
|
686,000
|
|
|
|
221,000
|
|
|
|
1,390,000
|
|
|
|
1,249,000
|
|
Depreciation and amortization
|
|
|
545,000
|
|
|
|
222,000
|
|
|
|
1,025,000
|
|
|
|
603,000
|
|
General and administrative
|
|
|
1,054,000
|
|
|
|
1,541,000
|
|
|
|
2,617,000
|
|
|
|
3,654,000
|
|
Total operating expenses
|
|
|
4,694,000
|
|
|
|
4,475,000
|
|
|
|
13,586,000
|
|
|
|
11,771,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss
|
|
|
(4,553,000
|
)
|
|
|
(4,304,000
|
)
|
|
|
(12,862,000
|
)
|
|
|
(11,239,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(559,000
|
)
|
|
|
(4,345,000
|
)
|
|
|
(2,524,000
|
)
|
|
|
(6,270,000
|
)
|
Expense related to preferred options
|
|
|
(62,091,000
|
)
|
|
|
-
|
|
|
|
(62,091,000
|
)
|
|
|
-
|
|
Expense related to modification of warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
(22,000
|
)
|
|
|
-
|
|
Loss from debt conversion
|
|
|
(2,842,000
|
)
|
|
|
-
|
|
|
|
(3,500,000
|
)
|
|
|
-
|
|
Inducement loss
|
|
|
(57,000
|
)
|
|
|
(2,273,000
|
)
|
|
|
(624,000
|
)
|
|
|
(3,829,000
|
)
|
Loss on debt extinguishment
|
|
|
(1,592,000
|
)
|
|
|
-
|
|
|
|
(1,592,000
|
)
|
|
|
-
|
|
Change in fair value derivative and warrant liability
|
|
|
6,000
|
|
|
|
4,748,000
|
|
|
|
1,777,000
|
|
|
|
4,748,000
|
|
Loss on convertible note settlement
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,611,000
|
|
Gain on convertible note penalties accrual
|
|
|
-
|
|
|
|
-
|
|
|
|
760,000
|
|
|
|
-
|
|
Total other (expense) income
|
|
|
(67,135,000
|
)
|
|
|
(1,870,000
|
)
|
|
|
(67,816,000
|
)
|
|
|
(2,740,000
|
)
|
Loss from continuing operations
|
|
|
(71,688,000
|
)
|
|
|
(6,174,000
|
)
|
|
|
(80,678,000
|
)
|
|
|
(13,979,000
|
)
|
Income (Loss) from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from discontinued operations
|
|
|
(1,490,000
|
)
|
|
|
1,178,000
|
|
|
|
(1,293,000
|
)
|
|
|
4,596,000
|
|
Gain from asset sale
|
|
|
-
|
|
|
|
-
|
|
|
|
15,682,000
|
|
|
|
-
|
|
Total Income (Loss) from discontinued operations, net of tax
|
|
|
(1,490,000
|
)
|
|
|
1,178,000
|
|
|
|
14,389,000
|
|
|
|
4,596,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(73,178,000
|
)
|
|
$
|
(4,996,000
|
)
|
|
$
|
(66,289,000
|
)
|
|
$
|
(9,383,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss per share, Basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(2.73
|
)
|
|
$
|
(7.92
|
)
|
|
$
|
(5.49
|
)
|
|
$
|
(18.54
|
)
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(0.06
|
)
|
|
|
1.51
|
|
|
|
(0.09
|
)
|
|
|
6.10
|
|
Gain on sale of assets
|
|
|
-
|
|
|
|
-
|
|
|
|
1.07
|
|
|
|
-
|
|
Total discontinued operations
|
|
|
(0.06
|
)
|
|
|
1.51
|
|
|
|
0.98
|
|
|
|
6.10
|
|
Net Loss per share of common stock – Basic and diluted
|
|
$
|
(2.79
|
)
|
|
$
|
(6.41
|
)
|
|
$
|
(4.51
|
)
|
|
$
|
(12.44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common stock outstanding – Basic and diluted
|
|
|
26,249,518
|
|
|
|
779,634
|
|
|
|
14,708,554
|
|
|
|
753,808
|
|
See accompanying notes to the unaudited
interim condensed consolidated financial statements.
ShiftPixy Inc.
Condensed Consolidated Statements of Stockholders’
Equity (Deficit)
For the Three Months Ended May 31, 2020
(Unaudited)
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
Total
Stockholders’
|
|
|
|
Issued
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
(Deficit)
|
|
Balance, March 1, 2020
|
|
|
1,103,643
|
|
|
$
|
-
|
|
|
$
|
37,620,000
|
|
|
$
|
(38,061,000
|
)
|
|
$
|
(441,000
|
)
|
Common stock issued for warrant exercise
|
|
|
6,275
|
|
|
|
-
|
|
|
|
33,000
|
|
|
|
-
|
|
|
|
33,000
|
|
Common stock issued for underwritten offering, net of offering costs
|
|
|
2,222,160
|
|
|
|
-
|
|
|
|
10,332,000
|
|
|
|
-
|
|
|
|
10,332,000
|
|
Stock-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
75,000
|
|
|
|
-
|
|
|
|
75,000
|
|
Common stock issued upon conversion of convertible notes and interest
|
|
|
441,573
|
|
|
|
-
|
|
|
|
4,023,000
|
|
|
|
-
|
|
|
|
4,023,000
|
|
Reclassification of derivative liabilities to paid in capital
|
|
|
-
|
|
|
|
-
|
|
|
|
288,000
|
|
|
|
-
|
|
|
|
288,000
|
|
Inducement loss on note conversions
|
|
|
1,012
|
|
|
|
-
|
|
|
|
57,000
|
|
|
|
-
|
|
|
|
57,000
|
|
Common stock issued for warrant exchange
|
|
|
82,653
|
|
|
|
-
|
|
|
|
552,000
|
|
|
|
-
|
|
|
|
552,000
|
|
Allocated fair value of beneficial conversion feature – exchanged notes payable
|
|
|
-
|
|
|
|
-
|
|
|
|
653,000
|
|
|
|
-
|
|
|
|
653,000
|
|
Allocated fair value of warrants issued – exchanged notes payable
|
|
|
-
|
|
|
|
-
|
|
|
|
2,006,000
|
|
|
|
-
|
|
|
|
2,006,000
|
|
Expense related to preferred options
|
|
|
-
|
|
|
|
-
|
|
|
|
62,091,000
|
|
|
|
|
|
|
|
62,091,000
|
|
Net Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(73,178,000
|
)
|
|
|
(73,178,000
|
)
|
Balance, May 31, 2020
|
|
|
3,857,316
|
|
|
$
|
-
|
|
|
$
|
117,730,000
|
|
|
$
|
(111,239,000
|
)
|
|
$
|
6,491,000
|
|
See accompanying notes to the
unaudited interim condensed consolidated financial statements.
ShiftPixy Inc.
Condensed Consolidated Statements of Stockholders’
Equity (Deficit)
For the Nine Months Ended May 31, 2020
(Unaudited)
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Total
Stockholders’
|
|
|
|
Issued
|
|
|
Paid-In
|
|
|
Treasury
|
|
|
Accumulated
|
|
|
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stock
|
|
|
Deficit
|
|
|
(Deficit)
|
|
Balance, September 1, 2019
|
|
|
909,222
|
|
|
$
|
-
|
|
|
$
|
32,505,000
|
|
|
$
|
(325,000
|
)
|
|
$
|
(44,950,000
|
)
|
|
$
|
(12,770,000
|
)
|
Treasury stock retired
|
|
|
(13,953
|
)
|
|
|
-
|
|
|
|
(325,000
|
)
|
|
|
325,000
|
|
|
|
-
|
|
|
|
-
|
|
Common stock issued for note exchange
|
|
|
21,750
|
|
|
|
-
|
|
|
|
200,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
200,000
|
|
Common stock issued for services rendered
|
|
|
856
|
|
|
|
-
|
|
|
|
75,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
75,000
|
|
Common stock issued for warrant exercise
|
|
|
6,275
|
|
|
|
|
|
|
|
33,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
33,000
|
|
Common stock issued for underwritten offering, net of offering costs
|
|
|
2,222,160
|
|
|
|
-
|
|
|
|
10,332,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,332,000
|
|
Common stock issued upon conversion of convertible notes and interest
|
|
|
589,695
|
|
|
|
-
|
|
|
|
6,238,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,238,000
|
|
Reclassification of derivative liabilities to paid in capital
|
|
|
-
|
|
|
|
-
|
|
|
|
1,979,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,979,000
|
|
Inducement loss on note conversions
|
|
|
38,658
|
|
|
|
-
|
|
|
|
624,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
624,000
|
|
Common stock issued for warrant exchange
|
|
|
82,653
|
|
|
|
-
|
|
|
|
552,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
552,000
|
|
Allocated fair value of beneficial conversion feature – exchanged notes payable
|
|
|
-
|
|
|
|
-
|
|
|
|
653,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
653,000
|
|
Allocated fair value of warrants issued – exchanged notes payable
|
|
|
-
|
|
|
|
-
|
|
|
|
2,006,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,006,000
|
|
Stock-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
745,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
745,000
|
|
Modification of warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
22,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,000
|
|
Expense related to preferred options
|
|
|
-
|
|
|
|
-
|
|
|
|
62,091,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
62,091,000
|
|
Net Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(66,289,000
|
)
|
|
|
(66,289,000
|
)
|
Balance, May 31, 2020
|
|
|
3,857,316
|
|
|
$
|
-
|
|
|
$
|
117,730,000
|
|
|
$
|
-
|
|
|
$
|
(111,239,000
|
)
|
|
$
|
6,491,000
|
|
See accompanying notes to the unaudited
interim condensed consolidated financial statements.
ShiftPixy Inc.
Condensed Consolidated Statements of Stockholders’
Deficit
For the Three Months Ended May 31, 2019
(Unaudited)
|
|
Common
Stock
Issued
|
|
|
Additional
Paid-In
|
|
|
Accumulated
|
|
|
Total
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Deficit
|
|
Balance, March 1, 2019
|
|
|
802,933
|
|
|
$
|
-
|
|
|
$
|
25,846,000
|
|
|
$
|
(30,610,000
|
)
|
|
$
|
(4,764,000
|
)
|
Common stock issued for services
rendered
|
|
|
2,024
|
|
|
|
-
|
|
|
|
113,000
|
|
|
|
-
|
|
|
|
113,000
|
|
Stock-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,000
|
)
|
|
|
-
|
|
|
|
(5,000
|
)
|
Reclassification of derivative liability upon conversion
of related convertible debentures
|
|
|
-
|
|
|
|
-
|
|
|
|
12,000
|
|
|
|
-
|
|
|
|
12,000
|
|
Common stock issued upon conversion of convertible
notes and interest
|
|
|
52,211
|
|
|
|
-
|
|
|
|
3,948,000
|
|
|
|
-
|
|
|
|
3,948,000
|
|
Inducement loss from debt conversion
|
|
|
43,787
|
|
|
|
|
|
|
|
2,273,000
|
|
|
|
-
|
|
|
|
2,273,000
|
|
Net Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,996,000
|
)
|
|
|
(4,996,000
|
)
|
Balance, May 31, 2019
|
|
|
900,955
|
|
|
$
|
-
|
|
|
$
|
32,187,000
|
|
|
$
|
(35,606,000
|
)
|
|
$
|
(3,419,000
|
)
|
ShiftPixy Inc.
Condensed Consolidated Statements of Stockholders’
Deficit
For the Nine Months Ended May 31, 2019
(Unaudited)
|
|
Common
Stock
Issued
|
|
|
Additional
Paid-In
|
|
|
Accumulated
|
|
|
Total
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Deficit
|
|
Balance, September 1, 2018
|
|
|
721,295
|
|
|
$
|
-
|
|
|
$
|
18,468,000
|
|
|
$
|
(26,223,000
|
)
|
|
$
|
(7,755,000
|
)
|
Warrants exercised for cash
|
|
|
6,688
|
|
|
|
-
|
|
|
|
660,000
|
|
|
|
-
|
|
|
|
660,000
|
|
Common stock issued for services
rendered
|
|
|
2,990
|
|
|
|
-
|
|
|
|
225,000
|
|
|
|
-
|
|
|
|
225,000
|
|
Stock-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
154,000
|
|
|
|
-
|
|
|
|
154,000
|
|
Reclassification of derivative liability upon conversion
of related convertible debentures
|
|
|
-
|
|
|
|
-
|
|
|
|
12,000
|
|
|
|
-
|
|
|
|
12,000
|
|
Common stock issued upon conversion of convertible
notes and interest
|
|
|
101,679
|
|
|
|
-
|
|
|
|
8,839,000
|
|
|
|
-
|
|
|
|
8,839,000
|
|
Inducement loss from debt conversion
|
|
|
68,303
|
|
|
|
-
|
|
|
|
3,829,000
|
|
|
|
-
|
|
|
|
3,829,000
|
|
Net Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(9,383,000
|
)
|
|
|
(9,383,000
|
)
|
Balance, May 31, 2019
|
|
|
900,955
|
|
|
$
|
-
|
|
|
$
|
32,187,000
|
|
|
$
|
(35,606,000
|
)
|
|
$
|
(3,419,000
|
)
|
See accompanying notes to the
unaudited interim condensed consolidated financial statements.
ShiftPixy, Inc.
Condensed Consolidated Statements of
Cash Flows
(Unaudited)
|
|
For the Nine Months Ended
|
|
|
|
May 31,
2020
|
|
|
May 31,
2019
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(66,289,000
|
)
|
|
$
|
(9,383,000
|
)
|
Income from discontinued operations
|
|
|
14,389,000
|
|
|
|
4,596,000
|
|
Net loss from continuing operations
|
|
|
(80,678,000
|
)
|
|
|
(13,979,000
|
)
|
Adjustments to reconcile net loss from continuing operations to net cash used in continuing operating activities:
|
|
|
|
|
|
|
|
|
Expense related to preferred options
|
|
|
62,091,000
|
|
|
|
-
|
|
Depreciation and amortization
|
|
|
1,025,000
|
|
|
|
603,000
|
|
Gain on convertible note settlement
|
|
|
-
|
|
|
|
(2,611,000
|
)
|
Gain on convertible note penalties accrual
|
|
|
(760,000
|
)
|
|
|
-
|
|
Amortization of debt discount and debt issuance cost
|
|
|
6,749,000
|
|
|
|
3,599,000
|
|
Stock issued for services
|
|
|
75,000
|
|
|
|
225,000
|
|
Stock-based compensation- general and administrative
|
|
|
745,000
|
|
|
|
154,000
|
|
Expense related to warrant modification
|
|
|
22,000
|
|
|
|
-
|
|
Inducement loss on note conversions
|
|
|
624,000
|
|
|
|
3,829,000
|
|
Expense related to warrant exchange
|
|
|
552,000
|
|
|
|
-
|
|
Non-cash interest
|
|
|
-
|
|
|
|
509,000
|
|
Change in fair value of derivative and warrant liability
|
|
|
(1,777,000
|
)
|
|
|
(4,748,000
|
)
|
Financing costs
|
|
|
-
|
|
|
|
2,588,000
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(763,000
|
)
|
|
|
(58,000
|
)
|
Unbilled accounts receivable
|
|
|
(996,000
|
)
|
|
|
(455,000
|
)
|
Prepaid expenses
|
|
|
54,000
|
|
|
|
(205,000
|
)
|
Other current assets
|
|
|
54,000
|
|
|
|
32,000
|
|
Deposits – workers’ compensation
|
|
|
3,283,000
|
|
|
|
(729,000
|
)
|
Deposits and other assets
|
|
|
(16,000
|
)
|
|
|
27,000
|
|
Accounts payable
|
|
|
(151,000
|
)
|
|
|
925,000
|
|
Payroll related liabilities
|
|
|
(108,000
|
)
|
|
|
1,269,000
|
|
Accrued workers’ compensation
|
|
|
1,665,000
|
|
|
|
423,000
|
|
Other current liabilities
|
|
|
(2,284,000
|
)
|
|
|
(215,000
|
)
|
Total Adjustments
|
|
|
70,084,000
|
|
|
|
5,162,000
|
|
Net cash used in continuing operating activities
|
|
|
(10,594,000
|
)
|
|
|
(8,817,000
|
)
|
Net cash provided by discontinued operating activities
|
|
|
76,000
|
|
|
|
7,194,000
|
|
Net cash used in operating activities
|
|
|
(10,518,000
|
)
|
|
|
(1,623,000
|
)
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchase of fixed assets
|
|
|
(81,000
|
)
|
|
|
(581,000
|
)
|
Proceeds from sale of fixed assets
|
|
|
34,000
|
|
|
|
-
|
|
Proceeds from working capital adjustment – sale of assets
|
|
|
1,214,000
|
|
|
|
-
|
|
Proceeds from sale of assets
|
|
|
9,500,000
|
|
|
|
-
|
|
Net cash provided by (used in) investing activities
|
|
|
10,667,000
|
|
|
|
(581,000
|
)
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds from underwritten public offering, net of offering costs
|
|
|
10,332,000
|
|
|
|
-
|
|
Proceeds from issuance of convertible notes
|
|
|
-
|
|
|
|
3,750,000
|
|
Issuance costs related to convertible notes
|
|
|
-
|
|
|
|
(485,000
|
)
|
Repayment of convertible notes
|
|
|
(1,240,000
|
)
|
|
|
(436,000
|
)
|
Proceeds from exercise of warrants
|
|
|
33,000
|
|
|
|
660,000
|
|
Net cash provided by financing activities
|
|
|
9,125,000
|
|
|
|
3,489,000
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
|
9,274,000
|
|
|
|
1,285,000
|
|
Cash - Beginning of Period
|
|
|
1,561,000
|
|
|
|
1,650,000
|
|
Cash -End of Period
|
|
$
|
10,835,000
|
|
|
$
|
2,935,000
|
|
Supplemental Disclosure of Cash Flows Information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
315,000
|
|
|
$
|
226,000
|
|
|
|
|
|
|
|
|
|
|
Non-cash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
Conversion of debt and accrued interest into common stock
|
|
$
|
6,238,000
|
|
|
$
|
8,839,000
|
|
Additional Principal to settle registration rights penalties
|
|
|
-
|
|
|
|
889,000
|
|
Common stock issued for services
|
|
|
75,000
|
|
|
|
-
|
|
Common stock issued for note exchange
|
|
|
200,000
|
|
|
|
-
|
|
Additional principal issued for note exchange
|
|
|
433,000
|
|
|
|
-
|
|
Interest capitalized into notes receivable
|
|
|
59,000
|
|
|
|
-
|
|
Common stock issued in exchange for warrants
|
|
|
552,000
|
|
|
|
-
|
|
Discount recorded for asset sale note receivable
|
|
|
1,818,000
|
|
|
|
-
|
|
Reclassification of derivative liabilities to paid in capital
|
|
|
1,979,000
|
|
|
|
-
|
|
Expense related to warrant modification
|
|
|
22,000
|
|
|
|
-
|
|
See accompanying notes to the unaudited
interim condensed consolidated financial statements.
ShiftPixy, Inc.
Notes to the Condensed Consolidated Financial
Statements
(Unaudited)
May 31, 2020
Note 1: Nature of Operations
ShiftPixy, Inc. was incorporated on June
3, 2015. The Company is a specialized staffing service provider that provides solutions for large contingent part-time workforce
demands, primarily in the restaurant and hospitality service trades. The Company’s focus is on the restaurant industry in
Southern California.
On March 25, 2020, the Company filed Amended
and Restated Articles of Incorporation (the “Restated Articles of Incorporation”) with the Wyoming Secretary of State,
which were approved by the Company’s board of directors (the “Board of Directors”) and its shareholders representing
a majority of its outstanding shares of capital stock. The Restated Articles of Incorporation, among other things, set conversion
rights for the Company’s Class A Preferred Stock, par value $0.0001 per share, to convert into shares of common stock on
a one-for-one basis.
The Company and its wholly-owned subsidiary
Rethink, Inc. (“RT”) function as employment administrative services (“EAS”) providers including services
such as administrative and processing services, performing functions in the nature of a payroll processor, human resources consultant,
administrator of workers’ compensation coverages and claims and provide workers compensation coverage written in the names
of the clients (as may be required by some states). The Company has built a human resources information systems platform to assist
in customer acquisition and hopes that this mechanism may become a way to onboard new clients into the Company’s closed proprietary
operating and processing information system (the “ShiftPixy Ecosystem”) when eligible clients recognize the value of
the services provided by the parent Company. This platform is expected to facilitate additional value-added services in future
reporting periods. In January 2020, the Company sold Shift Human Capital Management Inc. (“SHCM”), previously a wholly-owned
subsidiary of the Company, and assigned the majority of the Company’s billable clients to a third party for cash as described
below in Note 3 and formed RT.
The Company is currently operating in one
reportable segment.
Note 2: Summary of significant accounting
policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of
America (“GAAP”) and the rules of the Securities and Exchange Commission (“SEC”) applicable to interim
reports of companies filing as a smaller reporting company. Accordingly, the Company does not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for fair presentation have been included. The results of operations for the three and
nine months ended May 31, 2020, are not necessarily indicative of the results that may be expected for the year ending August 31,
2020.
For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended August
31, 2019, filed with the SEC on December 13, 2019.
Principles of Consolidation
The Company and its wholly-owned subsidiary
have been consolidated in the accompanying unaudited condensed consolidated financial statements. All intercompany balances have
been eliminated in consolidation.
Use of Estimates
The preparation of financial statements
in conformity with GAAP requires the Company to make estimates and assumptions that affect certain reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates
include:
|
·
|
Valuation expense related to preferred stock options
|
|
|
|
|
·
|
Liability for legal contingencies;
|
|
|
|
|
·
|
Useful lives of property and equipment;
|
|
|
|
|
·
|
Assumptions made in valuing embedded derivatives and freestanding equity-linked instruments classified as liabilities;
|
|
|
|
|
·
|
Deferred income taxes and related valuation allowance;
|
|
|
|
|
·
|
Valuation of long-lived assets including long term notes receivable; and
|
|
|
|
|
·
|
Projected development of workers’ compensation claims.
|
Revenue and Direct Cost Recognition
The Company provides an array of human
resources and business solutions designed to help improve business performance.
The Company’s revenues are primarily
attributable to fees for providing staffing solutions and EAS/human capital management services. The Company recognizes revenue
when all of the following criteria are met: (i) persuasive evidence of an arrangement exists; (ii) the services have been rendered
to the customer; (iii) the sales price is fixed or determinable; and (iv) collectability is reasonably assured. The Company enters
into contracts with its clients for EAS based on a stated rate and price in the contract. Contracts generally have a term of 12
months but are cancellable at any time by either party with 30 days’ notice. Contract performance obligations are satisfied
as services are rendered, and the time period between invoicing and when the performance obligations are satisfied is not significant.
The Company does not have significant financing components or significant payment terms for its customers and consequently has
no material credit losses. Payments for the Company’s services are typically made in advance of, or at the time that the
services are provided.
The Company accounts for its EAS revenues
in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
605-45, Revenue Recognition, Principal Agent Considerations. EAS solutions revenue is primarily derived from the Company’s
gross billings, which are based on (i) the payroll cost of the Company’s worksite employees (“WSEs”) and (ii)
a mark-up computed as a percentage of payroll costs for payroll taxes and workers compensation premiums.
Gross billings are invoiced to each client
concurrently with each periodic payroll of the Company’s WSEs which coincides with the services provided and which is typically
a fixed percentage of the payroll processed. Revenues, which exclude the payroll cost component of gross billings and therefore
consist solely of markup, are recognized ratably over the payroll period as WSEs perform their service at the client worksite.
Revenues that have been recognized but not invoiced are included in unbilled accounts receivable on the Company’s condensed
consolidated balance sheets, and were $270,000 and $170,000 as of May 31, 2020 and August 31, 2019, respectively.
Consistent with the Company’s revenue
recognition policy, direct costs do not include the payroll cost of its WSEs. The cost of revenue associated with the Company’s
revenue generating activities is primarily comprised of all other costs related to its WSEs, such as the employer portion of payroll-related
taxes, employee benefit plan premiums and workers’ compensation insurance costs.
The Company has evaluated its revenue recognition policies in
conjunction with its future expected business which may be migrating to a staffing business model. For fiscal years 2020 and 2019,
there were no revenues which should have been evaluated under a staffing business model. Such a staffing business model would have
included the payroll costs in revenues with a corresponding increase to cost of revenues for payroll costs associated with staffing
services.
Concentration of Credit Risk
The Company considers all highly liquid
investments with an original maturity of three months or less when purchased as cash equivalents. The Company maintains cash with
a commercial bank and from time to time exceed the federally insured limits. The Company has not experienced losses from these
deposits.
No one individual client represents more than 10% of revenues
for the three and nine months ended May 31, 2020, and May 31, 2019, respectively. However, three clients represent 93% of total
accounts receivable at May 31, 2020.
Impairment and Disposal of Long-Lived
Assets
The Company periodically evaluates its
long-lived assets for impairment in accordance with ASC 360-10, Property, Plant, and Equipment. ASC 360-10 requires that
an impairment loss be recognized for assets to be disposed of or held-for-use when the carrying amount of an asset is deemed to
not be recoverable. If events or circumstances were to indicate that any of our long-lived assets might be impaired, the Company
would assess recoverability based on the estimated undiscounted future cash flows to be generated from the applicable asset. In
addition, the Company may record an impairment loss to the extent that the carrying value of the asset exceeded the fair value
of the asset. Fair value is generally determined using an estimate of discounted future net cash flows from operating activities
or upon disposal of the asset. There were no impairments recognized for the periods ended May 31, 2020, and May 31, 2019.
Workers’ compensation
Everest Program
Up to July 2018, a portion of the Company’s
workers’ compensation risk was covered by a retrospective rated policy, which calculates the final policy premium based on
the Company’s loss experience during the term of the policy and the stipulated formula set forth in the policy. The Company
funds the policy premium based on standard premium rates on a monthly basis and based on the gross payroll applicable to workers
covered by the policy. During the policy term and thereafter, periodic adjustments may involve either a return of previously paid
premiums or a payment of additional premiums by the Company or a combination of both. If the Company’s losses under that
policy exceed the expected losses under that policy, then the Company could receive a demand for additional premium payments.
The Company utilizes a third-party to estimate its loss development
rate, which is based primarily upon the nature of WSEs’ job responsibilities, the location of WSEs, the historical frequency
and severity of workers’ compensation claims, and an estimate of future cost trends. Each reporting period, changes in the
assumptions resulting from changes in actual claims experience and other trends are incorporated into its workers’ compensation
claims cost estimates. As of May 31, 2020, the Company classified $0.1 million in long term accrued workers’ compensation
in the Company’s condensed consolidated balance sheets.
Sunz Program
Starting in July 2018, the Company’s workers’ compensation
program for its WSEs has been provided through an arrangement with United Wisconsin Insurance Company and administered by the Sunz
Insurance Company. Under this program, the Company has financial responsibility for the first $0.5 million of claims per occurrence.
The Company provides and maintains a loss fund that will be used to pay claims and claim related expenses. The workers’ compensation
insurance carrier established monthly funding requirements comprised of premium costs and funds to be set aside for payment of
future claims (“claim loss funds”). The level of claim loss funds is primarily based upon anticipated WSE payroll levels
and expected workers’ compensation loss rates, as determined by the insurance carrier. Monies funded into the program for
incurred claims expected to be paid within one year are recorded as Deposit - workers’ compensation, a short-term asset,
while the remainder of claim funds are included in deposits- workers’ compensation, a long-term asset in its condensed consolidated
balance sheets.
As of May 31, 2020, the
Company had $0.5 million in deposit – workers’ compensation classified as a short-term asset and $0.3 million classified
as a long-term asset.
The Company’s estimate of incurred claim costs expected
to be paid within one year is included in short-term liabilities, while its estimate of incurred claim costs expected to be paid
beyond one year is included in long-term liabilities on its consolidated balance sheets. As of May 31, 2020, the Company had short
term accrued workers’ compensation costs of $0.5 million and long term accrued workers’ compensation costs of $1.0
million.
The Company retained workers compensation
asset reserves and workers compensation related liabilities for former WSEs of clients transferred to Shiftable HR Acquisition, LLC, part of Vensure Employer Services,
Inc. (“Vensure”) in connection with the Asset Sale (as defined below). As of May 31, 2020, the retained workers compensation assets and liabilities are
presented as a discontinued operations net asset or liability. As of May 31, 2020 the Company had $2.4 million in both short
term assets and short term liabilities and had $1.7 million of long term assets and $5.5 million of long term liabilities.
Because the Company bears the financial
responsibility for claims up to the level noted above, such claims, which are the primary component of its workers’ compensation
costs, are recorded in the period incurred. Workers’ compensation insurance includes ongoing health care and indemnity coverage
whereby claims are paid over numerous years following the date of injury. Accordingly, the accrual of related incurred costs in
each reporting period includes estimates, which take into account the ongoing development of claims and therefore requires a significant
level of judgment. In estimating ultimate loss rates, the Company utilizes historical loss experience, exposure data, and actuarial
judgment, together with a range of inputs which are primarily based upon the WSE’s job responsibilities, their location,
the historical frequency and severity of workers’ compensation claims, and an estimate of future cost trends. For each reporting
period, changes in the actuarial assumptions resulting from changes in actual claims experience and other trends are incorporated
into its workers’ compensation claims cost estimates. The estimated incurred claims are based upon: (i) the level of claims
processed during each quarter; (ii) estimated completion rates based upon recent claim development patterns under the plan; and
(iii) the number of participants in the plan.
We expect additional workers compensation
claims to be made by furloughed WSEs as a result of the employment downturn caused by the COVID-19 pandemic. On May 4, 2020, the
State of California indicated that workers who became ill with COVID-19 would have a potential claim against workers compensation
insurance for their illnesses. We expect additional workers compensation claims could be made by employees required to work by
their employers during the COVID-19 pandemic, which could have a material impact to our workers compensation liability estimates.
While we have not seen additional expenses as a result of any such potential claims to date, which would include claims for reporting
periods after May 31, 2020, we will continue to closely monitor all workers compensation claims made during the COVID-19 pandemic.
Fair Value of Financial Instruments
ASC 825, “Financial Instruments,” requires entities
to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on the balance sheet,
for which it is practical to estimate fair value. ASC 825 defines fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing parties. At May 31, 2020 and August 31, 2019, the carrying
value of certain financial instruments (cash, accounts receivable and payable) approximates fair value due to the short-term nature
of the instruments. Convertible notes approximate fair value based on comparison of terms from similar instruments in the marketplace.
The Company measures fair value under a
framework that utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.
The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level
1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of inputs which prioritize
the inputs used in measuring fair value are:
|
·
|
Level 1: Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.
|
|
|
|
|
·
|
Level 2: Inputs to the valuation methodology include:
|
|
o
|
Quoted prices for similar assets or liabilities in active markets;
|
|
|
|
|
o
|
Quoted prices for identical or similar assets or liabilities in inactive markets;
|
|
|
|
|
o
|
Inputs other than quoted prices that are observable for the asset or liability;
|
|
|
|
|
o
|
Inputs that are derived principally from or corroborated by observable market data by correlation or other means; and
|
|
|
|
|
o
|
If the asset or liability has a specified (contractual) term, the level 2 input must be observable for substantially the full term of the asset or liability.
|
|
·
|
Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
|
The Company did not have any Level 1 or
Level 2 assets and liabilities at May 31, 2020 or August 31, 2019. The Company recorded expense related to preferred stock options
in the three and nine months ended May 31, 2020 using Level 2 fair value measurements. See Note 6 for assumptions used for this
valuation. The valuation of the Note Receivable (as defined below) from the Asset Sale (as defined below) and the derivative liabilities
associated with its March 2019 Notes (as defined below) (see Note 5), consisted of conversion feature derivatives and warrants,
are Level 3 fair value measurements.
Level 3 assets and liabilities:
The Note Receivable, as described in Note
3, was estimated using a discounted cash flow technique with significant inputs that are
not observable in the market and thus represents a Level 3 fair value measurement as defined in ASC 820. We valued the Note Receivable
on the January 1, 2020 transaction date using a 10% discount rate which contemplates the risk and probability assessments of the
expected future cash flows. The fair value assumptions have not changed as of May 31, 2020 and any impact to the fair value was
immaterial. For the three and nine months ended May 31, 2020 we identified $0.7 and $1.3 million of working capital adjustments,
respectively. The significant inputs in the Level 3 measurement not supported by market activity include the probability assessments
of expected future cash flows related to the acquisitions, appropriately discounted considering the uncertainties associated with
the obligation, and as calculated in accordance with the terms of the acquisition agreements. We believe there are risks associated
with the value of the Note Receivable due to business impacts of the COVID-19 pandemic. The expected cash payments from the Note
Receivable is based on gross profits generated by the clients transferred to Vensure. Those transferred clients may have their
business impacted due to the pandemic which, in turn, would result in lower gross profits. While we believe the current valuation
of the Note Receivable is properly recorded as of May 31, 2020, a material change in the business transferred may result in an
impairment of this asset. The development and determination of the unobservable inputs for Level 3 fair value measurements and
the fair value calculations are the responsibility of the Company’s chief financial officer and are approved by the chief
executive officer.
The table below sets forth a summary of
the changes in the fair value of the Company’s derivative liabilities classified as Level 3 as of May 31, 2020:
|
|
March 2019
Conversion
Feature
|
|
|
March 2019
Warrant
Liability
|
|
|
Total
|
|
Balance at August 31, 2019
|
|
$
|
2,852,000
|
|
|
$
|
904,000
|
|
|
$
|
3,756,000
|
|
Reclassification to APIC due to note settlements, exchanges or conversions
|
|
|
(1,784,000
|
)
|
|
|
(195,000
|
)
|
|
|
(1,979,000
|
)
|
Change in fair value
|
|
|
(1,068,000
|
)
|
|
|
(709,000
|
)
|
|
|
(1,777,000
|
)
|
Balance at May 31, 2020 (unaudited)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company had no derivative
liabilities as of May 31, 2020 since all the convertible notes were converted to equity or repaid and any warrants requiring
accounting as derivatives were exchanged for shares of common stock and new warrant issuances do not require derivative liability
accounting treatment. As of August 31, 2019, and during the nine months ended May 31, 2020, the Company estimated the fair value of the
conversion feature derivatives embedded in the convertible debentures and the fair value of the warrant liabilities based on
weighted probabilities of assumptions used in the Lattice-based option valuation model. The key valuation assumptions used
consist, in part, of the price of the common stock, a risk free interest rate based on the average yield of a
Treasury note and expected volatility of the common stock, all as of the measurement dates, and the various
estimated reset exercise prices weighted by probability.
The Company used the following assumptions
to estimate fair value of the derivatives in March 2020 prior to the amendments and exchanges for the convertible notes and warrants:
|
|
March 2019
Conversion
Feature
|
|
|
|
|
|
March 2019
Warrant
Liability
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
(unaudited)
|
|
Risk free rate
|
|
|
0.08-0.17
|
%
|
|
|
|
|
|
|
1.6
|
%
|
Market price per share
|
|
$
|
6.68
|
|
|
|
|
|
|
$
|
6.68
|
|
Life of instrument in years
|
|
|
0.47-1.15
|
|
|
|
|
|
|
|
4.0
|
|
Volatility
|
|
|
117-139
|
%
|
|
|
|
|
|
|
102
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
|
|
|
|
0
|
%
|
When the Company changes its valuation
inputs for measuring financial assets and liabilities at fair value, either due to changes in current market conditions or other
factors, it may need to transfer those assets or liabilities to another level in the hierarchy based on the new inputs used. The
Company recognizes these transfers at the end of the reporting period that the transfers occur. For the periods ended May 31, 2020
and May 31, 2019, there were no transfers of financial assets or financial liabilities between the hierarchy levels.
Research
and Development
During the three months
ended May 31, 2020 and May 31, 2019, the Company incurred research and development costs of approximately $1.5 million and $0.7
million, respectively. During the nine months ended May 31, 2020 and May 31, 2019, the Company incurred research and development
costs of approximately $3.4 million and $3.1 million, respectively. All costs were related to internally developed or externally
contracted software and related technology for the Company’s Human Resources Information System (“HRIS”) platform
and related mobile application. In addition, no software costs were capitalized for the three and nine months
ended May 31, 2020 and $0 and $0.5 million for the three and nine months ended May 31, 2019, respectively.
Advertising
Costs
The
Company expenses all advertising as incurred. The Company recorded net costs totaling $206,000 and $389,000 for the three and
nine months ended May 31, 2020, respectively, and expenses of $366,000 and $948,000 for the three and nine months ended May 31,
2019, respectively.
Convertible Debt
The Company evaluates embedded conversion features within convertible
debt under ASC 815 “Derivatives and Hedging” to determine whether the embedded conversion feature(s) should be bifurcated
from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in earnings. If the
conversion feature does not require derivative treatment under ASC 815, the instrument is evaluated under ASC 470-20 “Debt
with Conversion and Other Options” for consideration of any beneficial conversion features.
Reverse Stock Split
On December 17, 2019, the Company effected
a 1 for 40 reverse stock split. All common shares and common stock equivalents are presented retroactively to reflect the reverse
split.
Earnings (Loss) Per Share
The Company utilizes FASB ASC 260, “Earnings
per Share.” Basic earnings (loss) per share is computed by dividing earnings (loss) attributable to common stockholders by
the weighted-average number of common stock outstanding during the reporting period. Diluted earnings (loss) per share is computed
similar to basic earnings (loss) per share except that the denominator is increased to include additional common stock equivalents
available upon exercise of stock options and warrants using the treasury stock method. Dilutive common stock equivalents include
the dilutive effect of in-the-money share equivalents, which are calculated based on the average share price for each period using
the treasury stock method, excluding any common stock equivalents if their effect would be anti-dilutive. In periods in which a
net loss has been incurred, all potentially dilutive common stock is considered anti-dilutive and thus is excluded from the
calculation.
The number of shares used for the weighted average number of
common stock outstanding for the earnings per share for the three and nine months ended May 31, 2020 was increased by 24,634,560
shares effective as of January 1, 2020. This increase reflects the inclusion of common stock issuable upon full exercise of options
to purchase a similar number of preferred shares and full conversion of those shares of preferred stock to shares of common stock. The preferred
share option was deemed to be exercisable into preferred shares on the effective date of the Asset Sale as
described in Note 3. The one to one ratio of conversion of shares of preferred stock to shares of common stock was set on March 25, 2020 as described
in Note 6.
Securities used in, or that are excluded
from the calculation of weighted average dilutive common stock, because their inclusion would have been antidilutive are:
|
|
For the
Three Months
Ended
May 31,
2020
|
|
|
For the
Three Months
Ended
May 31,
2019
|
|
Options
|
|
|
43,406
|
|
|
|
48,792
|
|
Senior Convertible Notes (Note 5)
|
|
|
-
|
|
|
|
308,312
|
|
Warrants
|
|
|
1,896,209
|
|
|
|
107,410
|
|
Total potentially dilutive shares
|
|
|
1,939,615
|
|
|
|
464,514
|
|
Stock-Based Compensation
At May 31, 2020, the Company has one stock-based compensation
plan under which the Company may issue awards. The Company accounts for this plan under the recognition and measurement principles
of ASC 718, Compensation- Stock Compensation, which requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the condensed consolidated statements of operations on their fair values.
The grant date fair value is determined
using the Black-Scholes-Merton pricing model. For all employee stock options, the Company recognizes expense over the requisite
service period on an accelerated basis over the employee’s requisite service period (generally the vesting period of the
equity grant).
The Company’s option pricing model
requires the input of highly subjective assumptions, including the expected stock price volatility and expected term. The expected
volatility is based on the historical volatility of the Company. Any changes in these highly subjective assumptions significantly
impact stock-based compensation expense.
The Company elected to account for forfeitures as they occur.
As such, compensation cost previously recognized for an award that is forfeited because of the failure to satisfy a service condition
is revised in the period of forfeiture.
Treasury Stock
Treasury stock represents shares of common stock provided to
the Company in satisfaction of the related party advance, described in Note 13. Shares of common stock provided are recorded at
cost as treasury stock. The Company retired all of its treasury stock outstanding as of August 31, 2019 in fiscal 2020. Any treasury
stock retired is recorded to additional paid-in capital, limited to the amount previously credited to additional paid-in capital,
if any. Any excess is charged to accumulated deficit.
Reclassifications
Certain reclassifications have been made to prior year’s
data to confirm to the current year’s presentation. Such reclassifications had no impact on the Company’s financial
condition, operating results, cash flows or stockholders’ equity.
Recent Accounting Standards
In May 2014, the FASB issued Accounting
Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which outlines a single comprehensive
model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition
guidance, including industry-specific guidance. The core principle of the revenue model is that “an entity recognizes revenue
to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services.” The standard provides enhancements to the quality and consistency
of how revenue is reported by companies, while also improving comparability in the financial statements of companies reporting
using International Financial Reporting Standards or U.S. GAAP. The new standard also will require enhanced revenue disclosures,
provide guidance for transactions that were not previously addressed comprehensively, and improve guidance for multiple-element
arrangements. This accounting standard becomes effective for the Company for annual reporting periods beginning after December
15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. Early adoption is permitted
for annual reporting periods (including interim periods) beginning after December 15, 2016. This new standard permits the use of
either the retrospective or cumulative effect transition method. The Company is continuing to evaluate the impact and believes
that the adoption of Topic 606 will have a minimal impact.
In March 2016, the FASB issued ASU No.
2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations. The purpose of this standard
is to clarify the implementation of guidance on principal versus agent considerations related to ASU 2014-09. The standard has
the same effective date as ASU 2014-09 described above.
In April 2016, the FASB issued ASU No.
2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which provides clarity
related to ASU 2014-09 regarding identifying performance obligations and licensing implementation. The standard has the same effective
date as ASU 2014-09 described above.
In May 2016, the FASB issued ASU 2016-12:
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which provides narrow scope
improvements and practical expedients related to ASU 2014-09. The purpose of this standard is to clarify certain narrow aspects
of ASU 2014-09, such as assessing the collectability criterion, presentation of sales taxes, and other similar taxes collected
from customers, noncash consideration, contract modifications at transition, completed contracts at transition, and technical correction.
The standard has the same effective date as ASU 2014-09 described above.
In December 2016, the FASB issued ASU 2016-20:
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. The amendments in this standard affect
narrow aspects of guidance issued in ASU 2014-09. The standard has the same effective date as ASU 2014-09 described above. Topic
606 is effective for the company beginning with the fiscal year ending August 31, 2020.
In August 2018, the FASB issued ASU No.
2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value
Measurement. For all entities, amendments are effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant
unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should
be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All
other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted.
An entity is permitted to early adopt any removed or modified disclosures upon issuance of ASU No. 2018-13 and delay adoption of
the additional disclosures until their effective date. The Company is currently evaluating the potential impact this guidance will
have on the condensed consolidated financial statements, if any.
In February 2016, the FASB issued new accounting
guidance on leases ASU 2016-02, Leases. The new standard requires that a lessee recognize assets and liabilities on the balance
sheet for leases with terms longer than 12 months. The recognition, measurement and presentation of lease expenses and cash flows
by a lessee will depend on its classification as a finance or operating lease. The guidance also includes new disclosure requirements
providing information on the amounts recorded in the financial statements. In July 2018, the FASB issued ASU 2018-10, Codification
Improvements to Topic 842, Leases. For entities that early adopted Topic 842, the amendments are effective upon issuance of ASU
2018-10, and the transition requirements are the same as those in Topic 842. For entities that have not adopted Topic 842, the
effective date and transition requirements will be the same as the effective date and transition requirements in Topic 842. In
April 2020, the FASB voted to defer the effective date for private companies for one year. The updated effective date will be for
fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022.
The Company is evaluating the effect of
adopting this new accounting guidance and is currently finalizing its analysis of the financial impact of the adoption. The Company
expects to adopt the guidance using the modified retrospective method.
Note 3 – Discontinued Operations
On January 3, 2020, the Company executed an asset purchase agreement
assigning client contracts comprising approximately 88% of its quarterly revenue through the date of the transaction, including
100% of its existing professional employer organization (“PEO”) business effective as of December 31, 2019, and the
transfer of $1.5 million of working capital assets, including cash balances and certain operating assets associated with the assigned
client contracts included in the agreement (the “Asset Sale”). Gross proceeds from the Asset Sale were $19.2 million,
of which $9.7 million was received at closing and $9.5 million will be paid out in equal monthly payments over the next four years
(the “Note Receivable”), subject to adjustments for working capital and customer retention over the twelve month period
following the Asset Sale.
The following is a reconciliation of the gross proceeds to the
net proceeds from the Asset Sale as presented in the statement of cash flows for the period ending May 31, 2020.
Gross proceeds
|
|
$
|
19,166,000
|
|
Cash received at closing – asset sale
|
|
|
(9,500,000
|
)
|
Cash received at closing – working capital
|
|
|
(166,000
|
)
|
Discount recorded
|
|
|
(1,818,000
|
)
|
Less: Transaction reconciliation – working capital adjustment
|
|
|
(1,283,000
|
)
|
Adjusted Note Receivable
|
|
|
6,399,000
|
|
Short-term note receivable
|
|
|
1,291,000
|
|
Long-term note receivable
|
|
$
|
5,108,000
|
|
The Asset Sale generated a gain of $15.7
million for the nine months ended May 31, 2020. The Company expects a minimal tax impact from the Asset Sale as it intends to utilize
its net operating losses accumulated since inception to offset the gain resulting from discontinued operations tax provision with
a corresponding offset to the valuation allowance.
The Asset Sale met the criteria of discontinued
operations set forth in ASC 205 and as such the Company has reclassified its discontinued operations for all periods presented
and has excluded the results of its discontinued operations from continuing operations for all periods presented. The Company recorded
the Note Receivable net of a discount using its estimated cost of capital at a discount rate of (10%).
The Asset Sale calls for adjustments to the Note Receivable
either for: (i) working capital adjustments or (ii) in the event that the gross profit of the business transferred is less than
the required amount. Through May 31, 2020, the Company has identified $1,283,000 of working capital adjustments, including $88,000
related to lower net assets transferred at closing, $201,000 of liabilities paid on behalf of the Company, and $994,000 of cash
remitted to the Company’s bank accounts, net. Under the terms of the Asset Sale, a reconciliation of the working capital
was to have been completed by April 15, 2020. Due to operational difficulties and quarantined staff caused by the
outbreak of COVID-19, the reconciliation remains unresolved. The working capital adjustment recorded as of May 31, 2020
represents the Company’s estimate of the reconciliation. There is no assurance that the working capital change identified
as of May 31, 2020 represents the final working capital adjustment.
The carrying amounts of the classes of
assets and liabilities from the Asset Sale included in discontinued operations were as follows:
|
|
May 31, 2020
|
|
|
August 31, 2019
|
|
|
|
Unaudited
|
|
|
Unaudited
|
|
Cash
|
|
$
|
-
|
|
|
$
|
-
|
|
Accounts receivable and unbilled account receivable
|
|
|
-
|
|
|
|
8,526,000
|
|
Prepaid expenses and other current assets
|
|
|
-
|
|
|
|
171,000
|
|
Deposits – workers’ compensation
|
|
|
2,386,000
|
|
|
|
1,722,000
|
|
Total current assets
|
|
|
2,386,000
|
|
|
|
10,419,000
|
|
Fixed assets, net
|
|
|
-
|
|
|
|
40,000
|
|
Deposits – workers’ compensation
|
|
|
1,749,000
|
|
|
|
5,527,000
|
|
Total assets
|
|
$
|
4,135,000
|
|
|
$
|
15,986,000
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and other current liabilities
|
|
$
|
-
|
|
|
$
|
457,000
|
|
Payroll related liabilities
|
|
|
-
|
|
|
|
7,879,000
|
|
Accrued workers’ compensation cost
|
|
|
2,386,000
|
|
|
|
1,722,000
|
|
Total current liabilities
|
|
|
2,386,000
|
|
|
|
10,058,000
|
|
Accrued workers’ compensation cost
|
|
|
5,533,000
|
|
|
|
3,853,000
|
|
Total liabilities
|
|
|
7,919,000
|
|
|
|
13,911,000
|
|
|
|
|
|
|
|
|
|
|
Net assets/(liability)
|
|
$
|
(3,784,000
|
)
|
|
$
|
2,075,000
|
|
Reported results for the discontinued operations by period were
as follows:
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
May 31, 2020
|
|
|
May 31, 2019
|
|
|
May 31, 2020
|
|
|
May 31, 2019
|
|
Revenues (gross billings of $0 and $82.3 million less worksite employee payroll cost of $0 million and $69.7 million, respectively for the three months ended; gross billings of $120.0 million and $221.7 million less worksite employee payroll cost of $103.3 million and $187.3 million, respectively for Nine Months ended)
|
|
$
|
-
|
|
|
$
|
12,666,000
|
|
|
$
|
17,138,000
|
|
|
$
|
34,354,000
|
|
Cost of revenue
|
|
|
1,490,000
|
|
|
|
10,125,000
|
|
|
|
17,025,000
|
|
|
|
25,567,000
|
|
Gross profit (loss)
|
|
|
(1,490,000
|
)
|
|
|
2,541,000
|
|
|
|
113,000
|
|
|
|
8,787,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and payroll taxes
|
|
|
-
|
|
|
|
662,000
|
|
|
|
658,000
|
|
|
|
2,414,000
|
|
Commissions
|
|
|
-
|
|
|
|
701,000
|
|
|
|
748,000
|
|
|
|
1,777,000
|
|
Total operating expenses
|
|
|
-
|
|
|
|
1,363,000
|
|
|
|
1,406,000
|
|
|
|
4,191,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations
|
|
$
|
(1,490,000
|
)
|
|
$
|
1,178,000
|
|
|
$
|
(1,293,000
|
)
|
|
$
|
4,596,000
|
|
Note 4: Going Concern
As of May 31, 2020, the Company had cash
of $10.8 million and a working capital surplus of $3.4 million. During the nine months ended May 31, 2020, the Company used approximately
$10.6 million of cash from its continuing operations and repaid $1.2 million of convertible notes, after receiving $9.5 million
of cash from the Asset Sale described below, and closed an underwritten public offering and receiving $10.3 million, net of offering
costs. The Company has incurred recurring losses resulting in an accumulated deficit of $111.2 million as of May 31, 2020. The
recurring losses and cash used in operations raise substantial doubt as to its ability to continue as going concern within one
year from issuance date of the financial statements.
Historically, the Company’s principal
source of financing has come through the sale of its common stock and issuance of convertible notes. The Company successfully
completed an IPO on The Nasdaq Stock Market LLC (“Nasdaq”) on June 29, 2017, raising a total of $12 million ($10.9
million net of costs). In June 2018, the Company completed a private placement of 8% senior secured convertible notes to institutional
investors raising $9 million of gross proceeds ($8.4 million net of costs). In March 2019, the Company completed a private placement
of senior secured notes to institutional investors raising $3.75 million ($3.3 million net of costs). Between September 1, 2019
and May 22, 2020 all convertible notes outstanding as of August 31, 2019 were repaid or converted into equity. On May 26, 2020,
the Company successfully completed an underwritten public offering raising a total of $12 million ($10.3 million net of costs)
and closed an additional $1.35 million ($1.25 million net of costs) between June 1, 2020 and July 7, 2020 pursuant to the underwriter’s
overallotment. The Company’s plans and expectations for the next 12 months include raising additional capital to help fund
expansion of its operations, including the continued development and support of its IT and HR platform. The Company engaged an
investment banking firm to assist the Company in (i) preparing information materials, (ii) advising the Company concerning the
structure, price and conditions and (iii) organizing the marketing efforts with potential investors in connection with a financing
transaction.
In January 2020, the Company assigned approximately
88% of its customer contracts in exchange for $9.7 million in cash at closing and received an additional $1.0 million of cash,
net of $0.9 million of cash transferred, and expects to receive an additional $7.5 million over the four years following the closing
of the Asset Sale, subject to certain closing conditions. The Company transferred $1.6 million of working capital, including $0.9
million of cash. The business transferred represented approximately $6.0 million of the Company’s annualized gross profit.
The
Company continues to experience significant growth in the number of WSEs, which would generate additional administrative fees that
would offset the current level of operational cash burn. The Company retained the high growth business which accounted for over
100% of billings and revenue growth. The Company also retained the rights to monetize the existing pool of WSEs and has begun to
roll out its delivery and scheduling applications to its customers.
The Company has and will be impacted by the COVID-19 pandemic.
The current business focus is on providing payroll services for the restaurant and hospitality industries which have seen a significant
reduction in payroll and consequently a reduction in payroll processing fees. Between March 1, 2020 and May 31, 2020, the number
of our billed clients has been reduced by approximately 20% as a result of workforce reduction from our clients. To date, some
of our clients have received Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) benefits to offset this
reduction, but not at significant levels, and our business has been impacted since the COVID-19 lockdown starting in March 2020.
If the lockdown continues, our clients delay hiring or rehiring employees, or if our clients shut down operations, our ability
to generate operational cash flows may be significantly impaired.
The Company’s management believes,
but cannot be certain, that the Company’s current cash position, along with its revenue growth and the financing from potential
institutional investors will be sufficient to fund its operations for at least a year from the date these financials are available.
If these sources do not provide the capital necessary to fund the Company’s operations during the next twelve months from
the date of this Report, the Company may need to curtail certain aspects of its operations or expansion activities, consider the
sale of additional assets, or consider other means of financing. The Company can give no assurance that it will be successful in
implementing its business plan and obtaining financing on terms advantageous to the Company, or that any such additional financing
will be available to the Company. These condensed consolidated financial statements do not include any adjustments for this uncertainty.
Note 5: Senior Convertible Notes Payable
The Company has issued four series of senior
secured convertible notes payable (collectively, the “Senior Convertible Notes”). In general, each series is convertible
into shares of common stock. At August 31, 2019, the Company had $6.8 million of the Senior Convertible Notes in default. During
the nine months ended May 31, 2020, the Company entered into a series of note amendments, exchanges, and settlements resulting
in the resolution of the default conditions and subsequent repayment or conversion of all Senior Convertible Notes. The Senior
Convertible Notes Payable consist of the following:
|
|
May 31
|
|
|
August 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(unaudited)
|
|
|
|
|
Senior Convertible Notes, Principal
|
|
$
|
-
|
|
|
$
|
6,808,000
|
|
Less: debt discount and deferred financing costs
|
|
|
-
|
|
|
|
(3,457,000
|
)
|
Total outstanding convertible notes, net
|
|
$
|
-
|
|
|
$
|
3,351,000
|
|
Less: current portion of convertible notes payable
|
|
|
-
|
|
|
|
(3,351,000
|
)
|
Long-term convertible notes payable
|
|
$
|
-
|
|
|
$
|
-
|
|
As of August 31, 2019, the Company had
been declared in default of its Senior Convertible Notes for not honoring conversion notices in June 2019. Three of the Company’s
five institutional investors had filed litigation and the Senior Convertible Notes were considered to be in default as of August
31, 2019. See also Note 9 for additional information on the litigation related to the Senior Convertible Notes.
During the nine months ended May 31, 2020,
the Company resolved all litigation related to its outstanding notes and all of the Senior Convertible Notes were repaid in cash
or converted into common stock. On August 31, 2019 the Company had gross principal of $6,808,000 representing:
|
·
|
June 2018 Senior Convertible Notes due September 6, 2019 with
a principal balance of $1,466,000 (the “June 2018 Notes”). The June 2018 Notes were converted or repaid in cash in
January 2020 as described in the activity below.
|
|
·
|
Senior Convertible Notes due December 31, 2019 with a principal
balance of $867,000 (the “December 2018 Notes”). The December 2018 Notes were either exchanged for December 2019 Exchange
Notes and subsequently converted into common shares, converted into common shares in January 2020 or repaid in cash in January
2020 as described in the activity below.
|
|
·
|
Senior Convertible Notes due September 12, 2020 with a principal
balance of $4,475,000 (the “March 2019 Notes”). The March 2019 Notes were either exchanged for December 2019 Exchange
Notes (as defined below), converted or repaid in cash in January 2020 or exchanged for amended notes in March 2020 which were
converted in the quarter ended May 31, 2020.
|
On December 6, 2019, the Company entered
into an exchange agreement with the holder of $2,445,000 of its March 2019 Notes and $222,000 of its December 2018 Notes for new
senior convertible notes (the “December 2019 Exchange Notes”). The December 2019 Exchange Notes and the related warrant
and note conversion agreement revised the conversion price of the holder’s December 2018 Notes and March 2019 Notes to $40.00
per share, extended the term of the notes to March 1, 2022, provided for a revised quarterly amortization schedule beginning April
1, 2020 of 12.5% of the principal balance as of January 31, 2020 payable in cash, and removed certain anti-dilution terms warrants
issued in March 2019 (the “March 2019 Warrants”). The Company agreed to issue an additional $200,000 of consideration
to the holder, payable in common stock, as consideration for this exchange and agreed to increase the principal outstanding on
the notes exchanged by 10% from $222,000 for the December 2018 Notes to $244,000, and from $2,445,000 for the March 2019 Notes
to $2,690,000, for a combined revised principal balance of $2,934,000. On December 11, 2019, the Company issued 21,750 shares of
common stock to the holder in satisfaction of the additional $200,000 of consideration. The Company provided for up to 10% of the
revised combined principal of $2,934,000 to be converted at a reduced price of $12.20 per share until January 31, 2020. In January
2020, the investor converted $293,000 into 24,049 shares of common stock. The Company evaluated the exchange under ASC 470 and
determined that the exchange should be treated as a debt modification. The Company recorded an additional note discount of $467,000
representing the combined additional shares issued, valued at $200,000 and the additional $267,000 in notes issued in the exchange.
December 2019 Exchange
The terms of the December 2019 Exchange
Notes are summarized as follows:
|
·
|
Term: April 1, 2022;
|
|
·
|
Coupon: 0%;
|
|
·
|
Default interest rate: 18%;
|
|
·
|
10% of the revised note balance may be converted at $12.20 per share until January 31, 2020
|
|
·
|
Remainder Convertible at the option of the holder at any time at a price of $40 per share but subject to down round price protection;
|
|
·
|
Amortization payment of 12.5% of January 31, 2020 principal balance payable in cash;
|
|
·
|
Alternate conversion percentage is 75% if the alternate conversion
is an alternate conversion event of default as a result of bankruptcy or default related to missed amortization payment, subject
to a floor conversion price of $1.84 per share, 80% for all alternate event of default conversion, or 85% if such alternate conversion
is an alternate optional conversion;
|
|
·
|
Redemption at the option of the Company at 15% premium at any time.
|
In January 2020, one investor received a legal judgement for
$500,000 plus default interest of $52,000. The judgement was paid in cash in January 2020, which included the repayment of $310,000
principal of the March 2019 Notes. Upon payment of the legal judgement, the litigation was resolved with this investor.
In January 2020, the Company settled all
legal claims with two investors by entering into settlement agreements and by payment of $2,047,000 in cash and the issuance of
103,593 shares of common stock. The settlements resulted in the elimination of combined default penalties, default interest, and
$2,194,000 of principal of the June 2018 Notes, the December 2018 Notes, and the March 2019 Notes.
In January 2020, the Company reduced the
conversion price of the remaining June 2018 Notes and the December 2018 Notes payable to $12.20, and $500,000 of the June 2018
Notes and the December 2018 Notes were converted into 41,004 shares of common stock. An additional 4,207 shares of common stock
were issued in settlement of default interest of $51,000.
In January 2020, one investor converted
$130,000 of the March 2019 Note principal and $28,000 of accrued default interest at $12.20 per share into 12,915 shares of common
stock, and one investor converted $293,000 of the December 2019 Exchange Notes into 24,049 shares at a conversion price of $12.20
per share.
As a result of these settlements and conversions,
the Company recorded $567,000 of additional expense for debt conversion inducement representing the value of the shares issued
at market and the $12.20 per share conversion price on the date of issuance.
The Company had previously recorded $1,800,000
of accrued interest and penalties as of August 31, 2019. As a result of the settlements and resolution of litigation, the Company
recorded a gain of $760,000 for the quarter ended February 29, 2020 and the nine months ended May 31, 2020.
March 2020 Warrant and Note Exchanges
and Note Conversions
Between March 1, 2020 and March 22, 2020,
the conversion terms of the December 2019 Exchange Notes and March 2019 Notes were modified at the mutual agreement of the investors
and the Company to temporarily change the conversion price to a fixed conversion price of $9.20 per share. Three investors converted
$1,047,000 of the Company’s Convertible Notes and $25,000 of accrued default interest into 135,508 shares of common stock
at a conversion price of $9.20 per share. The Company recorded an additional loss on note conversion of $413,000 representing the
pro rata portion of the unamortized note discount and deferred financing fees.
On March 23, 2020, the Company entered
into the following Amendment and Exchange Agreements (the “Amendment and Exchange Agreements”) with certain institutional
investors, pursuant to which the Company amended and restated certain existing March 2019 Notes including the capitalization of
$59,000 of accrued default interest (the “Amended and Restated Notes”) and issued (i) convertible notes in an aggregate
principal amount of $167,000 convertible into shares of common stock at a conversion price of $9.20 per share of common stock (the
“Exchange Notes”), (ii) warrants to purchase an aggregate of 162,950 shares of common stock at an exercise price of
$10.17 per share of common stock (the “Exchange Warrants”) and (iii) an aggregate of 82,654 shares of common stock:
|
·
|
On March 23, 2020, the Company entered into an Amendment and
Exchange Agreement with Alpha Capital Anstalt (“Alpha”) pursuant to which the Company (a) issued to Alpha an
Amended and Restated Note in an aggregate principal amount of $723,000, including capitalization of $51,000 of accrued
default interest, and (b) in exchange for outstanding warrants to purchase shares of common stock held by Alpha, issued to
Alpha (i) 66,123 shares of common stock, (ii) a March 2020 Exchange Warrant to purchase 130,360 shares of common stock and
(iii) a March 2020 Exchange Note in an aggregate principal amount of $145,000.
|
|
·
|
On March 23, 2020, the Company entered into an Amendment and
Exchange Agreement with Osher Capital Partners LLC (“Osher”) pursuant to which the Company (a) issued to Osher an Amended
and Restated Note in an aggregate principal amount of $108,000, including the capitalization of $8,000 of accrued default interest
and (b) in exchange for outstanding warrants to purchase shares of common stock held by Osher, issued to Osher (i) 16,531 shares
of common stock, (ii) a March 2020 Exchange Warrant to purchase 32,590 shares of common stock and (iii) a March 2020 Exchange Note
in an aggregate principal amount of $22,000.
|
On March 24, 2020, the Company entered
into an Exchange Agreement (the “Exchange Agreement” and, together with the Amendment and Exchange Agreements, the
“March 2020 Agreements”) with CVI Investments, Inc. (“CVI”) pursuant to which CVI exchanged its outstanding
senior convertible note due 2022 for (i) a warrant to purchase 260,719 shares of common stock (the “CVI Exchange Warrant”
and, together with the Exchange Warrants the “March 2020 Exchange Warrants”) and (b) a senior convertible note in an
aggregate principal amount of $1,829,000 convertible into shares of common stock at a conversion price of $9.20 per share (the
“CVI Exchange Note”, and together with the Exchange Notes, the “March 2020 Exchange Notes”).
The Company evaluated the March 2020
Agreements as an exchange under ASC 470 and determined that the exchanges should be treated as debt extinguishments and
reissuances. The Company accelerated the remaining unamortized discount and deferred financing fees as of the date of the
exchange and recorded the fair value of the shares issued in exchange for the warrants cancelled as a loss on exchange of
$1,592,000. The Company valued the revised conversion features of the Amended and Restated Notes, the March 2020 Exchange
Notes and the March 2020 Exchange Warrants using the binomial method and recorded a discount of $2,825,000 on the exchange
dates. The Company used the following assumptions to value the conversion features and March 2020 Exchange Warrants:
|
|
March 2020
Conversion
Feature
|
|
|
March 2020
Exchange
Warrants
|
|
|
|
|
(unaudited)
|
|
|
|
(unaudited)
|
|
Risk free rate
|
|
|
0.08-0.17
|
%
|
|
|
0.038
|
%
|
Market price per share
|
|
$
|
6.63-6.68
|
|
|
$
|
6.63- 6.68
|
|
Life of instrument in years
|
|
|
0.47-1.15
|
|
|
|
5.5
|
|
Volatility
|
|
|
117-139
|
%
|
|
|
117
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Between March 24, 2020 and May 18, 2020
CVI converted $1,829,000 of its senior convertible notes into 198,756 shares of common stock, Alpha converted $868,000 of its senior
convertible notes into 94,298 shares of common stock and Osher converted $130,000 of its senior convertible notes into 14,023 shares
of common stock. These conversions resulted in full acceleration of all unamortized debt discount to expense of $2,419,000, recorded
as other expense in the statement of operations as loss on conversion.
Certain conversions during the quarter
ended May 31, 2020 resulted in shares issued below the closing market price on the date of conversion. The Company recorded $57,000
of additional loss on conversion to the statement of operations for the three months ended May 31, 2020 representing the difference
in fair value between the closing share price and the conversion price on the date of issuance.
The following table rolls forward the Senior
Convertible Notes balances and related deferred financing costs and note discount balances from August 31, 2019 to May 31, 2020:
|
|
Gross
Principal
|
|
|
Deferred
Financing
Costs
|
|
|
Note
Discount
|
|
|
Net
|
|
Balance at August 31, 2019
|
|
$
|
6,808,000
|
|
|
$
|
(344,000
|
)
|
|
$
|
(3,113,000
|
)
|
|
$
|
3,351,000
|
|
Repayments in cash
|
|
|
(1,240,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,240,000
|
)
|
Conversions to common stock
|
|
|
(6,060,000
|
)
|
|
|
89,000
|
|
|
|
3,402,000
|
|
|
|
(2,569,000
|
)
|
Notes issued – December 2019 exchange
|
|
|
267,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
267,000
|
|
Additional note discount issued – December 2019 exchange
|
|
|
-
|
|
|
|
-
|
|
|
|
(467,000
|
)
|
|
|
(467,000
|
)
|
Acceleration of discount and deferred financing cost - extinguishment
|
|
|
-
|
|
|
|
88,000
|
|
|
|
960,000
|
|
|
|
1,048,000
|
|
Additional notes issued – March 2020 exchange
|
|
|
166,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
166,000
|
|
Interest capitalized – March 2020 exchange
|
|
|
59,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
59,000
|
|
Additional note discount issued – March 2020 exchange
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,825,000
|
)
|
|
|
(2,825,000
|
)
|
Amortization of interest expense
|
|
|
-
|
|
|
|
167,000
|
|
|
|
2,043,000
|
|
|
|
2,210,000
|
|
Balance at May 31, 2020
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
During the three and nine months ended
May 31, 2020, the Company amortized $555,000 and $2,210,000, respectively, and for the three and nine months ended May 31, 2019,
the Company amortized $722,000 and $1,433,000, respectively, to interest expense from the combined amortization of deferred financing
costs and note discounts recorded at issuance for the June 2018 Notes, the March 2019 Notes, March 2019 Exchange Notes, and the
December 2019 Exchange Notes (as defined above).
Note 6: Stockholders’ Equity
Preferred Stock
As previously disclosed by the Company,
in September 2016, the founding shareholders of the Company were granted options to acquire preferred stock of the Company (the
“Preferred Options”). The number of Preferred Options granted were based upon the number of shares held at that time.
These Preferred Options are nontransferable and forfeited upon the sale of the related founding shares of common stock. Upon
the occurrence of certain specified events, such founding shareholders could exercise each Preferred Option to purchase one share
of preferred stock of the Company at an exercise price of $0.0001 per share. The preferred stock underlying the Preferred Options
does not include any rights to dividends or preference upon liquidation of the Company and is convertible into shares of common
stock on a one-for-one basis pursuant to the Restated Articles of Incorporation. The Preferred Options became exercisable to purchase
shares of preferred stock upon the Asset Sale in January 2020. On March 25, 2020 the Company recorded an expense related to preferred
options in other expense of $62.1 million representing the Black-Scholes value of 24,634,560 options exercisable and exchangeable
into an equal number of shares of common stock.
The Company initially evaluated the preferred
options using the Level 1 market price on the March 25, 2020 date and concluded that the market price on that date represented
an illiquid market price and therefore not a reliable valuation metric. The Company then evaluated the preferred options on the
March 25, 2020 date and valued the preferred options using Level 2 inputs of an estimated market price based on the cash per share
received from the May 2020 Public Offering, as adjusted for the fair value of the warrants issued in conjunction with the May 2020
offering. The resulting allocated common share price was then discounted for a lack of marketability due to the lock-up provisions
of the shares issuable to arrive at a preferred option fair value of $2.52 per option. The Company used the following assumptions
to value the expense related to the preferred options:
Option life of 3.77 years, Risk free rate
of 0.47%, volatility of 134%, exercise price of $0.0001 per share and a fair value of $3.62 per common share.
On June 4, 2020, Scott Absher, the Company’s
Chief Executive Officer, exercised 12,500,000 Preferred Options for 12,500,000 shares of preferred stock. Immediately thereafter,
Mr. Absher converted all 12,500,000 shares of preferred stock into 12,500,000 shares of common stock. These shares of common stock
are subject to a two-year lockup from the date of the conversion. As of the date of this filing, 12,134,560 Preferred Options remain
outstanding and exercisable. The right to exercise the options terminates on December 31, 2023. As stated above, the amount of
the Preferred Options, and the number of shares of preferred stock issuable upon exercise of such options, is based upon the number
of shares of common stock held by such founding shareholders at the time such options were issued. Accordingly, in order to confirm
the original intent of the granting of up to 50,000,000 of such options to two of our founding shareholders, Mr. Absher and Stephen
Holmes, at some point in the future the Company intends to adopt a second grant of options, exercisable upon the occurrence of
certain specified events, granting an additional 12,500,000 options to each of Messrs. Absher and Holmes whereby each option permits
the holder to acquire one share of preferred stock of the Company for $0.0001 per share. Each share of preferred stock will
be convertible into common stock on a one-for-one basis.
The May 2020 Public Offering
On May 20, 2020, the Company entered into
an underwriting agreement (the “Underwriting Agreement”) with A.G.P./Alliance Global Partners (“A.G.P.”),
in connection with a public offering (the “May 2020 Offering”) of an aggregate of (i) 1,898,850 shares of our common
stock, (ii) pre-funded warrants to purchase 323,310 shares of common stock (the “Pre-Funded Warrants”) and (iii) warrants
to purchase 1,277,580 shares of common stock (the “May 2020 Common Warrants”), which included the partial exercise
of A.G.P.’s over-allotment option to purchase 166,500 additional Common Warrants.
Each share of common stock and Pre-Funded
Warrant sold in the May 2020 Offering was sold together with a Common Warrant as a fixed combination, with each share of common
stock and Pre-Funded Warrant sold being accompanied by a Common Warrant to purchase 0.5 shares of common stock. The shares of common
stock and accompanying Common Warrants were sold at a price to the public of $5.40, less underwriting discounts and commissions
and the Pre-Funded Warrants and accompanying Common Warrants were sold at a price to the public of $5.399, less underwriting discounts
and commissions. The Common Warrants were immediately exercisable and will expire on May 26, 2025 and have an exercise price of
$5.40 per share, subject to anti-dilution and other adjustments for certain stock splits, stock dividends, or recapitalizations.
The May 2020 Offering closed on May 26,
2020 for gross proceeds of approximately $12.0 million, prior to deducting $1.7 million of costs consisting of underwriting discounts
and commissions and offering expenses payable by the Company, which includes a partial exercise of the underwriter’s over-allotment
option to purchase additional Common Warrants. All Pre-Funded Warrants issued or issuable were exercised on the closing date of
May 26, 2020. Pursuant to the Underwriting Agreement, the Company, upon closing of the Offering, issued to A.G.P. warrants to purchase
up to 111,108 shares of common stock (the “Underwriter Warrants”), which is 5.0% of the aggregate number of shares
of common stock and shares of common stock issuable upon exercise of the Pre-Funded Warrants sold in the May 2020 Offering.
The Underwriter Warrants are exercisable at any time and from time to time, in whole or in part, commencing from six months after
the closing date and ending five years from the closing date, at a price per share equal to $5.94, which is 110% of the public
offering price per share.
On June 11, 2020 the Company closed an
over-allotment option from the May 2020 Offering for additional gross proceeds of approximately $0.9 million, prior to deducting
underwriting discounts and commissions and offering expenses payable by the Company, representing the partial exercise of A.G.P.’s
over-allotment option to purchase 166,500 shares of common stock at $5.40 per share.
On July 7, 2020, the Company closed an over-allotment option
from the May 2020 Offering for additional gross proceeds of approximately $0.45 million, prior to deducting underwriting discounts
and commissions and offering expenses payable by us, representing the partial exercise of A.G.P.’s over-allotment option
to purchase 83,840 shares of common stock at $5.40 per share.
Common Stock and Warrants
On December 17, 2019, the Company effected
a 1 for 40 reverse stock split. All common stock and common stock equivalents are presented retroactively to reflect the reverse
split.
During the nine months ended May 31, 2020,
the Company issued the following:
|
·
|
2,222,160 shares of common stock were issued pursuant to the May 2020 Offering at $5.40 per share as described above.
|
|
·
|
628,353 shares of common stock were issued for the conversion of $6,060,000 of June 2018 Notes, December 2018 Notes, March 2019 Notes, and December 2019 Exchange Notes payable and $178,000 of related default interest payable.
|
|
|
|
|
·
|
82,653 shares of common stock valued at $552,000 were issued to two senior convertible note holders as an inducement to eliminate the March 2019 Warrants and as partial consideration to amend the senior notes to a fixed conversion price.
|
|
|
|
|
·
|
21,750 shares of common stock valued at $200,000 was issued as an inducement to exchange $2.7 million of March 2019 Notes for $2.9 million of December 2019 Exchange Notes.
|
|
|
|
|
·
|
6,275 shares of common stock were issued for a warrant exercise for cash proceeds of $33,000.
|
|
·
|
856 shares of common stock were issued to two directors for services valued at $75,000.
|
|
|
Number
of
shares
|
|
|
Weighted
average
remaining
life
(years)
|
|
|
Weighted
average
exercise
price
|
|
Warrants outstanding, August 31, 2019
|
|
|
107,409
|
|
|
|
4.3
|
|
|
$
|
83.21
|
|
Issued
|
|
|
1,840,773
|
|
|
|
5.1
|
|
|
|
7.03
|
|
(Cancelled)
|
|
|
(45,698
|
)
|
|
|
4.3
|
|
|
|
78.13
|
|
(Exercised)
|
|
|
(6,275
|
)
|
|
|
3.6
|
|
|
|
5.29
|
|
Warrants outstanding, May 31, 2020
|
|
|
1,896,209
|
|
|
|
5.0
|
|
|
$
|
8.42
|
|
Warrants exercisable, May 31, 2020
|
|
|
1,472,540
|
|
|
|
4.9
|
|
|
$
|
7.91
|
|
The warrant reconciliation table above
excludes 323,310 “pre-funded” warrants that were originally subscribed to be issued in conjunction with the underwritten
offering closing on May 26, 2020. The “pre-funded” warrants were to be sold at $5.399 per share and exercisable at $0.001
per share but were all exercised and fully paid prior to the May 26, 2020 closing. The 323,310 shares are included in the 2,222,160
common share count reported above for the underwritten public offering.
The following tables summarize our warrants
outstanding as of May 31, 2020:
|
|
Warrants
Outstanding
|
|
|
Weighted average
Life of Outstanding Warrants in years
|
|
|
Exercise
price
|
|
May 2020 Offering Common Warrants
|
|
|
1,277,580
|
|
|
|
5.0
|
|
|
$
|
5.40
|
|
May 2020 Offering Underwriter Warrants
|
|
|
111,108
|
|
|
|
5.0
|
|
|
|
5.40
|
|
March 2020 Exchange Warrants (1)
|
|
|
423,669
|
|
|
|
5.3
|
|
|
|
10.17
|
|
Amended March 2019 Warrants (2)
|
|
|
66,288
|
|
|
|
4.0
|
|
|
|
40.00
|
|
March 2019 Services Warrants
|
|
|
3,366
|
|
|
|
4.0
|
|
|
|
70.00
|
|
June 2018 Warrants
|
|
|
6,276
|
|
|
|
3.8
|
|
|
|
40.00
|
|
June 2018 Services Warrants
|
|
|
5,422
|
|
|
|
3.8
|
|
|
|
99.60
|
|
2017 PIPE Warrants
|
|
|
2,500
|
|
|
|
2.3
|
|
|
|
276.00
|
|
|
|
|
1,896,209
|
|
|
|
5.0
|
|
|
$
|
7.91
|
|
|
(1)
|
Warrants were issued in conjunction with the March 2020 Agreements
as described in Note 5 above. Warrants are not exercisable until September 23, 2020.
|
|
(2)
|
Warrants include 13,015 March 2019 Warrants that were amended in December 2019 to modify the exercise price to a fixed exercise price of $40.00 per share from $70 per share and an additional 53,273 warrants issued during the December 2019 Note exchange.
|
All warrants outstanding and exercise prices
have been adjusted to reflect the 1:40 reverse split.
Note 7: Stock Based Compensation
The Company granted no options during
the nine months ended May 31, 2020. The Company recognized approximately $75,000 and $745,000 of compensation expense for the
three and nine months ended May 31, 2020, respectively. During the nine months ended May 31, 2020, the Company fully vested all
options granted to personnel who were terminated as a result of the Asset Sale which resulted in the acceleration of 9,737 options
and $483,000 of stock-based compensation recorded in stock-based compensation – general and administrative.
At May 31, 2020, the total unrecognized
deferred share-based compensation expected to be recognized over the remaining weighted average vesting periods of 0.9 years for
outstanding grants was $0.6 million.
A summary of option activity was as follows:
|
|
Options Outstanding and Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
Number
|
|
|
Remaining
|
|
|
Average
|
|
|
|
of
|
|
|
Contractual
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Life
|
|
|
Price
|
|
|
|
|
|
|
(In years)
|
|
|
|
|
Balance, August 31, 2019
|
|
|
50,749
|
|
|
|
9.0
|
|
|
$
|
95.20
|
|
Granted
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Forfeited
|
|
|
(7,343
|
)
|
|
|
8.5
|
|
|
|
69.85
|
|
Balance at May 31, 2020
|
|
|
43,406
|
|
|
|
8.4
|
|
|
$
|
99.55
|
|
Options outstanding as of May 31, 2020
had aggregate intrinsic value of $0.
Option vesting activity was as follows:
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
Number
|
|
|
Remaining
|
|
|
Average
|
|
|
|
of
|
|
|
Contractual
|
|
|
Exercise
|
|
Options Vested
|
|
Options
|
|
|
Life
|
|
|
Price
|
|
|
|
|
|
|
(In years)
|
|
|
|
|
Balance, August 31, 2019
|
|
|
10,291
|
|
|
|
8.0
|
|
|
$
|
152.80
|
|
Vested
|
|
|
17,310
|
|
|
|
8.4
|
|
|
|
91.85
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Forfeited
|
|
|
(1,305
|
)
|
|
|
5.2
|
|
|
|
140.09
|
|
Balance at May 31, 2020
|
|
|
26,296
|
|
|
|
7.9
|
|
|
$
|
118.41
|
|
The following table summarizes information
about stock options outstanding and vested at May 31, 2020:
|
|
Options Outstanding and Exercisable
|
|
|
Options Vested
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
Number
|
|
|
Remaining
|
|
|
Average
|
|
|
Number
|
|
|
Remaining
|
|
|
Average
|
|
|
|
of
|
|
|
Contractual
|
|
|
Exercise
|
|
|
of
|
|
|
Contractual
|
|
|
Exercise
|
|
Exercise Prices
|
|
Options
|
|
|
Life
|
|
|
Price
|
|
|
Options
|
|
|
Life
|
|
|
Price
|
|
|
|
|
|
|
(In years)
|
|
|
|
|
|
|
|
|
(In years)
|
|
|
|
|
$18.80-$40.00
|
|
|
5,375
|
|
|
|
9.0
|
|
|
$
|
24.35
|
|
|
|
758
|
|
|
|
9.0
|
|
|
$
|
29.38
|
|
$40.01–$80.00
|
|
|
13,729
|
|
|
|
8.8
|
|
|
|
51.21
|
|
|
|
7,473
|
|
|
|
8.8
|
|
|
|
51.22
|
|
$80.01–$120.00
|
|
|
10,553
|
|
|
|
8.0
|
|
|
|
102.93
|
|
|
|
6,881
|
|
|
|
8.0
|
|
|
|
102.56
|
|
$120.01–$160.00
|
|
|
12,625
|
|
|
|
7.3
|
|
|
|
155.28
|
|
|
|
10,060
|
|
|
|
7.2
|
|
|
|
155.26
|
|
$160.01-$391.60
|
|
|
1,124
|
|
|
|
7.1
|
|
|
|
391.60
|
|
|
|
1,124
|
|
|
|
7.1
|
|
|
|
391.60
|
|
|
|
|
43,406
|
|
|
|
8.2
|
|
|
$
|
99.55
|
|
|
|
26,296
|
|
|
|
7.9
|
|
|
$
|
118.41
|
|
The number of options and exercise prices
have been presented retroactively for the 1 for 40 December 17, 2019 reverse split.
Note 8: Related Parties
J. Stephen Holmes, our Sales Manager, is an advisor to and significant
shareholder of the Company. The Company incurred $180,000 and $540,000 in professional fees for management consulting services
in the three and nine months ended May 31, 2019 and $180,000 and $540,000 in the three and nine months ended May 31, 2020, respectively.
On December 23, 2019, the Company issued
428 shares to each of Messrs. Higgins and White, both directors of the Company, in settlement of shares promised in December 2018
but not issued. The fair value on the date issued for the combined issuance of 856 shares was $75,000.
Note 9: Contingencies
Certain conditions may exist as of the
date the financial statements are issued, which may result in a loss to the Company, but which will be resolved only when one or
more future events occur or fail to occur. The Company’s management, in consultation with its legal counsel as appropriate,
assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment.
During the ordinary course of business,
the Company is subject to various claims and litigation. Management believes that the outcome of such claims or litigation will
not have a material adverse effect on the Company’s financial position, results of operations or cash flow.
Convertible Note Related Litigation
During 2019, three of the Company’s
note holders filed legal complaints. During the nine months ended May 31, 2020 all Convertible Note related litigation was resolved
as follows:
Alpha Capital v. ShiftPixy, Inc.
On July 3, 2019, the Company was served
with a complaint filing by Alpha Capital Anstalt (“ACA”) in the United States District Court, Southern District of
New York alleging breach of contract in refusing to honor the conversion of certain convertible notes, specifically one for $310,000
submitted on June 20, 2019. ACA sought an injunction requiring the Company to issue 25,000 shares of common stock, damages for
the claimed breaches, and attorneys’ fees. In August 2019, the court denied the motion for a preliminary injunction but granted
accelerated discovery which was completed in September 2019. As of November 30, 2019, the Company had convertible notes outstanding
with ACA for approximately $1.7 million consisting of $0.3 million of the June 2018 Notes, $0.2 million of the December 2018 Notes
and $1.2 million of the March 2019 Notes. In January 2020, Alpha was awarded a judgement for $500,000 consisting of the $310,000
of notes and $190,000 of damages and accrued interest of $51,000. On January 16, 2020 Alpha Capital converted all remaining June
2018 Note and December 2018 Note balances at $12.20 per share. On January 20, 2020, the Company paid the damages award including
interest in cash and resolved the litigation.
Dominion Capital LLC v. ShiftPixy, Inc.
On July 18, 2019, the Company was
served with a complaint filing by Dominion Capital LLC (“Dominion”) in the United States District Court, Southern
District of New York alleging breach of contract in refusing to honor the conversion of certain convertible notes. Dominion
sought injunctive relief, injunction to prohibit buyback, breach of contract on the June 2018 Notes, the December 2018 Notes,
and the March 2019 Notes, and declaratory judgment. In August 2019, the court denied the motion for a preliminary injunction
but granted accelerated discovery which was completed in September 2019. On January 22, 2020, the Company settled all claims
and repaid all remaining notes and cancelled all related warrants by issuing 83,593 shares of common stock on the date of
issuance and paid cash of $1,322,000.
MEF I, LP v. ShiftPixy, Inc.
On August 27, 2019, MEF I, LP (“MEF”) filed a complaint
in the United States District Court, Southern District of New York. MEF sought monetary relief of $2.1 million and to appoint themselves
as receiver of the Company. As of August 31, 2019, the Company had convertible notes outstanding to MEF at approximately $0.7 million
face value consisting of approximately $0.5 million and $0.2 million for the June 2018 Notes and the December 2018 Notes, respectively.
In November 2019, the Company filed a motion in response to the receiver request. On January 17, 2020, the Company and MEF I settled
all claims, pursuant to which the Company repaid all note principal remaining, accrued damages, and accrued interest and cancelled
the June 2018 Warrants with the issuance of 20,000 shares of common stock and payment of $725,000 in cash.
See also Note 5 above.
Kadima Ventures
The Company is in a dispute with its former
software developer, Kadima Ventures (“Kadima”), over incomplete but paid for software development work. In May 2016,
the Company entered into a contract with Kadima for the development and deployment of user features that were proposed by Kadima
for an original build cost of $2.2 million to complete. This proposal was later revised upward to approximately $7.2 million to
add certain features to the original proposal. As of the date of this Report, the Company has paid approximately $11 million to
Kadima, but has never been provided access to the majority of the promised software. Kadima refused to continue development work,
denied access to developed software, and refuses to surrender to the Company any software that it has developed unless the Company
pays an additional $12.0 million above the $11.0 million already paid. In addition to the non-delivery of the paid for user features,
Kadima asserts that it is owed additional funds to turn over the work completed. In April 2019, Kadima filed a complaint against
the Company in the Superior Court of the State of Arizona, Maricopa County, alleging claims for breach of contract, promissory
estoppel and unjust enrichment, and seeking damages in excess of $11.0 million. The Company vigorously disputes and denies each
of Kadima’s claims, including that it owes any sums to Kadima, and further believes that it is entitled, at a minimum, to
a refund of a substantial portion of the sums that it has already paid, along with the release of the software modules currently
being withheld. In June, 2020 the Company engaged in mediation discussions with Kadima in an attempt to resolve the matter, which
was unsuccessful. On July 14, 2020 the Company filed an answer to Kadima’s complaint, which denied Kadima’s claims
and asserted counter-claims for breach of contract and fraud.
Splond
Litigation
On April 8, 2019, claimant, Corey Splond,
filed a class action lawsuit, on behalf of himself and other similarly situated individuals, in the Eighth Judicial District Court
for the State of Nevada, Clark County, naming the Company and its client as defendants, and alleging violations of certain wage
and hour laws. This lawsuit is in the initial stages, and the Company denies any liability. Even if the plaintiff ultimately prevails,
the potential damages recoverable will depend substantially upon whether the Court determines in the future that this lawsuit may
appropriately be maintained as a class action. Further, in the event that the Court ultimately enters a judgment in favor
of plaintiff, the Company believes that it would be contractually entitled to be indemnified by its client against at least a portion
of any damage award.
Note
10: Subsequent Events
Litigation:
On June 29, 2020, the Company was served
with a complaint filed by one of its former clients in the Superior Court of the State of California, Orange County, naming the
Company, two of its officers, and one of its former subsidiaries as defendants. The Complaint asserts multiple causes of action,
all of which stem from the former client’s claim that the Company is obligated to reimburse it for sums it paid in settlement
of a separate lawsuit brought by one of its employees pursuant to the California Private Attorneys General Act of 2004. This underlying
lawsuit alleged that our former client was responsible for multiple violations of the California Labor Code. The Company and the
officers named as defendants deny the former client’s allegations, and the Company intends to defend the lawsuit vigorously.
Employee Stock Option Plan Increase:
On July 1, 2020, the Board of Directors
unanimously approved an increase in the number of shares of common stock issuable under our of the Company’s 2017 Stock Option/Stock
Issuance Plan from 250,000 to 3,000,000, subject to approval by a majority of the Company’s shareholders no later than the
next regularly scheduled annual shareholders meeting. Also on July 1, 2020, our Board approved the award, primarily to current
employees, and subject to shareholder approval no later than the next regularly scheduled annual meeting, of grants of options
to purchase 1,235,159 shares of the Company’s common stock at an exercise price of $5.40 per share, which was the closing
price of our stock as reported by Nasdaq at the close of trading on the day of the Board’s action. Of the options awarded,
995,000 are designated as “incentive stock options”, and 280,159 are designated as “non-qualifying” or
“non-statutory” options under the Internal Revenue Code. These options have a 10-year life, and will vest over a four
year period, with 25% vesting on July 1, 2021, and the remainder vesting ratably on a quarterly basis over the following three
years.
Additional COVID-19 Lockdown:
On July 13, 2020 the Governor of the State
of California re-implemented additional COVID-19 related lockdown provisions in most of the counties in the state, including those
located in Southern California where most of our clients reside. These lockdown provisions will likely require that in-person
dining be prohibited for at least one month. We believe that the impact to our business will be primarily felt based upon
the negative effect on those clients that rely more heavily upon in-person dining, but we have not had an opportunity to evaluate
fully the probable impact of this lockdown development on our overall customer base as of the date of these condensed consolidated
financial statements..
Management has evaluated subsequent events
pursuant to the issuance of the interim unaudited consolidated financial statements and has determined that, other than listed
above, no other reportable subsequent events exist through the date of these condensed consolidated financial statements.
Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations.
The following discussion of our financial
condition and results of operations should be read in conjunction with our financial statements and the related notes, and other
financial information included in this Form 10-Q.
Our Management’s Discussion and
Analysis contains not only statements that are historical facts, but also statements that are forward-looking. Forward-looking
statements are, by their very nature, uncertain and risky. These risks and uncertainties include international, national, and local
general economic and market conditions; our ability to sustain, manage, or forecast growth; our ability to successfully make and
integrate acquisitions; new product development and introduction; existing government regulations and changes in, or the failure
to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations
and difficulty in forecasting operating results; change in business strategy or development plans; business disruptions; the ability
to attract and retain qualified personnel; the ability to protect technology; the risk of foreign currency exchange rate; and other
risks that might be detailed from time to time in our filings with the Securities and Exchange Commission.
Although the forward-looking statements
in this Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently
known by them. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual
results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged
to carefully review and consider the various disclosures made by us in this Report as we attempt to advise interested parties of
the risks and factors that may affect our business, financial condition, and results of operations and prospects.
Our Management’s Discussion &
Analysis of Financial Condition and Results of Operations (“MD&A”) includes references to our performance measures
presented in accordance with GAAP and other non-GAAP financial measures that we use to manage our business, make planning decisions
and allocate resources. Refer to the Non-GAAP Financial Measures within our MD&A for definitions and reconciliations from GAAP
measures.
Overview
Our current business, and the primary source
of our revenues to date, has been under a traditional staffing services business model. Our initial market focus is to use this
traditional approach, coupled with developed technology, and address an underserved market containing predominately lower wage
employees with high turnover, in light industrial, services, and food and hospitality. We provide human resources, employment compliance,
insurance, payroll, and operational employment services solutions for our business clients (“clients” or “operators”)
and shift work or “gig” opportunities for WSEs (or “shifters”). As consideration for providing these services,
we receive administrative or processing fees as a percentage of a client’s gross payroll, process and file payroll taxes
and payroll tax returns, provide workers compensation insurance, and provide employee benefits. We have built a substantial business
on a recurring revenue model since our inception in 2015. For the fiscal year ended August 31, 2019, we processed over $350 million
of payroll billings. Our business has significantly grown for each year since inception and we expect to continue our track record
of significant customer growth. However, we have experienced losses to date as we have invested in both our technology solutions
as well as the back-office operations required to service a large employee base under a traditional staffing model.
Our revenues through the first nine
months of fiscal 2020 primarily consist of administrative fees calculated as a percentage of gross payroll processed, payroll
taxes due on WSEs billed to the client and remitted to the applicable taxation authority, and workers compensation premiums
billed to the client for which we facilitate workers compensation coverage. Our costs of revenues consist of accrued and paid
payroll taxes and our costs to provide the workers’ compensation coverage including premiums and loss reserves. A
significant portion of our assets and liabilities is for our workers compensation reserves. Our cash balances related to
these reserves are carried as assets and our estimates of projected workers’ compensation claims are carried as
liabilities. Since fiscal 2019, we have provided a self-funded workers compensation policy for up to $500,000 and purchased
reinsurance for claims in excess of $500,000. We actively and monitor and manage our clients and WSE’s compensation
claims, which we believe allows us to provide a lower cost workers’ compensation option for our clients than they would
otherwise be able to purchase on their own.
As of August 31, 2019, we had 246 clients
with over 13,000 WSEs, and processed payroll of over $350 million during our fiscal year ended August 31, 2019, an increase of
nearly 60% over our year ended August 31, 2018. Of these WSEs, approximately 60% represent workers in the restaurant industry.
In addition, as of August 31, 2019, there were an additional 12,000 inactive WSEs in our HRIS technology platform who are available
for gig opportunities. In January 2020, in connection with the Asset Sale, we assigned client contracts representing approximately
70% of our billable clients, which comprised approximately 88% of our quarterly revenue as of November 30, 2019, and certain operating
assets for $19.2 million in cash, of which $9.7 million was received at closing and $9.5 million is due over the next four years,
which was to have commenced in April 2020, subject to certain conditions, including the performance of the assigned contracts and
minimum working capital delivered. The payments have been delayed due to COVID-19 related issues.
We are currently focused on clients in
the restaurant and hospitality industries, traditionally market segments with high employee turnover and low pay rates. We believe
that our focus on these industries will be better served by our HRIS technology platform, which provides payroll and human resources
tracking for our clients and which, we believe, will result in lower operating costs, improved customer experience and revenue
growth acceleration. All of our clients enter into service agreements with us or our wholly-owned subsidiary, ReThink Human Capital
Management, Inc.
In connection with the Asset Sale, we retained
the WSE records of all WSEs billed through our systems. We view these WSEs as potential gig employees to provide gig staffing or
permanent employment for our current and future client customers. We have in excess of 35,000 WSEs in our system and 200,000 additional
WSEs through other business relationships.
Following the Asset Sale, our client count,
client site count, and billed WSE count decreased by approximately 88% from pre-Asset Sale metrics. On a comparative basis from
May 31, 2019 to February 29, 2020 (our last reporting period before the COVID-19 pandemic), our continuing and remaining client
count increased from 35 to 83 customers, representing approximately 250 client locations, and our billed WSEs increased from an
average of 1,600 to 3,100 at the end of February 2020. The quarter ended February 29, 2020 saw an annualized growth rate of over
100% for both clients and WSEs since November 30, 2019.
The COVID-19 pandemic has had a significant impact upon and delayed our expected growth, which we have
observed through a decrease in our billed customers and our WSEs beginning in mid-March 2020, upon the lockdown implemented by
the State of California. Significantly, all of our February 29, 2020 billed WSEs worked for clients located in Southern California,
and many of these clients were required to furlough or layoff employees or, in some cases, completely close their operations. However,
during the quarter ended May 31, 2020 we continued to close new customer opportunities. The combination of our sales efforts and
the opportunities our services provide to businesses impacted by the COVID-19 pandemic resulted in additional business opportunities
for new client location additions but our WSE billings per client location decreased as many clients were shut down, or reduced
staffing during the quarter.
For the month of May 2020, our billed client
count decreased to 81 clients, but client locations increased by 24% to over 300 client locations compared to February 2020. Monthly
“normalized” gross client billings decreased 23% from February 2020 levels to May 2020 levels as a result of the reduced
staffing levels. (“Normalized” gross billings represent actual billings adjusted for the number of billable days in
a given month, i.e. 29 billable days in February 2020 and 31 billable days in May 2020).
As the Southern California economy recovered
into June, we saw continued client additions and gross billing recovery. For the month of June 2020 our client count increased
to 84 clients with active billings, representing 315 client locations (an increase of 26% from February 2020 equivalent to a 150%
annualized client location growth rate) and saw gross client billings in excess of “normalized” February 2020 billings.
On July 13, 2020 the Governor of the State
of California re-implemented additional COVID-19 related lockdown provisions in most of the counties in the state, including those
located in Southern California where most of our clients reside. These lockdown provisions will likely require that in-person
dining be prohibited for at least one month. We believe that the impact to our business will be primarily felt based upon
the negative effect on those clients that rely more heavily upon in-person dining, but we have not had an opportunity to evaluate
fully the probable impact of this lockdown development on our overall customer base as of the date of this report.
Our Services
Our core EAS are provided via standard
legal contracts with our business clients, customized for each client’s specific needs, and are typically one year in length
and cancelable with 30 days’ notice by either party. Through May 31, 2020, we have not had any material revenues or billings
generated within our HRIS from additional value-added services. We consider our future service offering to be our future, which
we believe will provide for additional revenue streams and support cost reductions for existing and future business clients. Future
services, including technology-based services provided through our HRIS system and mobile application, will be through “a
la carte” pricing via customizable on-line contracts.
We provide our solution in the developing NextGEN or “gig”
economy primarily by absorbing our clients’ workers, whom we call worksite employees but may also be called “shift
workers,” “shifters,” “gig workers,” or “assigned employees.” WSEs are carried under
a ShiftPixy corporate employee umbrella and we shoulder certain employment-related compliance responsibilities for our business
clients as part of our services provided. This arrangement benefits WSEs by opening additional work opportunities through access
to other shift work with our other clients. Each WSE further benefits from employee status benefits through our benefit plan offerings,
including minimum essential health insurance coverage plans and a 401(k) plan while enjoying the protections of workers’
compensation coverage and employment laws.
At the heart of our employment service
solutions is the secure, cloud-based HRIS database accessible by a desktop or mobile device through which our WSEs will be enabled
to find available shift work at our client locations. This solution solves a problem of finding available shift work for both the
shifters looking for additional shift work and business clients looking to fill open shifts. For new WSEs, the mobile platform
includes an easy to use WSE onboarding functionality which we believe will increase our WSE pool of workers and provide a deep
bench of worker talent for our business clients. The onboarding feature of our software enables us to capture all application process
related data regarding our assigned employees and to introduce employees to and integrate them into the ShiftPixy Ecosystem. The
mobile platform features a “Pixy” chatbot that leverages artificial intelligence to aid in gathering the data from workers via a
series of questions designed to capture all required information, including customer specific and governmental information. Final
onboarding steps requiring signatures can also be prepared from the HRIS onboarding module.
Our initial market focus was chosen based
on our understanding of the issues and challenges facing “Quick Service Restaurants” (“QSRs”), including
fast food franchises and local restaurants. To this end, we have focused on the development of two key features of our mobile
application since 2019: (i) scheduling functionality, designed to enhance the client’s experience through scheduling of
employees and reducing the impact of turnover, and (ii) delivery functionality, designed to increase revenues through delivery
fulfillment as well as to bring this function “in house” and thereby reduce delivery costs.
The scheduling functionality described
above, which we implemented in our software during 2019, will enable each client worksite to schedule workers and to identify shift
gaps that need to be filled once it is fully functional. We utilize computer algorithms to maintain schedules and fulfillment,
using an active methodology to engage and move people to action. We began using this functionality at the end of fiscal 2019 on
a test basis and made additional deployments to our clients during the first half of fiscal 2020.
Also in 2019, as noted above, we designed
and built additional functionality to allow our restaurant clients to provide restaurant to consumer delivery services through
our technology platform. One of the most recent developments in the food and hospitality industry is the rapid rise of third-party
restaurant delivery providers such as Uber Eats, GrubHub, and DoorDash. These providers have successfully increased QSR revenue
in many local markets by providing food delivery to a wide-scale audience using contract delivery drivers. We have observed two
significant issues with our clients and third-party delivery providers which is increasingly being reported in the news media,
with companies like Dominos Pizza and Jimmy Johns franchises providing their own delivery and avoiding third party delivery services.
The first issue is the very large revenue share typically being paid to many of these third-party delivery providers as delivery
fees. These additional costs erode the profit for the QSRs from those additional sales made through this delivery channel. The
second is that our QSR customers have encountered problematic deliveries of their food products - late deliveries, cold food,
missing accessories, and unfriendly delivery people. This, in turn, has caused significant “brand erosion” in many
cases and has caused these clients to reconsider third-party delivery.
We provide a solution to the third-party
delivery issues. We designed our HRIS platform to manage food deliveries by the QSRs using internal personnel and a customized
“white label” smart phone App. Our recently released delivery feature links this “white label” delivery
ordering system to our delivery solution, thereby freeing the QSR to have their own brand showcasing an ordering mobile phone application
(“App”) but retaining similar back-office delivery technology including scheduling, ordering, and delivery status pushed
to a customer’s smart phone. Our technology and approach to human capital management allows a company unique window into
the daily demands of QSR operators and the ability to extend our technology and engagement to enable this unique self-delivery
proposition. Our new driver management layer for operators in the ShiftPixy ecosystem will allow clients to use their own team
members to deliver a brand intended customer experience. Our mobile platform provides the HR compliance, management and insurance
solutions necessary to the support of a delivery option and creates a turnkey self-delivery opportunity for the individual QSR
operator. Our solution saves delivery costs to the QSR client and allows them to retain the customer information and quality control
over the food delivery.
The first phase of this component of our
platform is driver onboarding, which was completed during fiscal 2019. The enhanced features accompanying driver onboarding, when
fully functional, will allow our operator clients to “micro meter” the essential commercial insurance coverages required,
(such as workers’ compensation and auto coverage), on a delivery-by-delivery basis (workers’ compensation and auto
coverages). The absence of such capabilities, which our platform will provide, has been a significant barrier in the past for some
QSRs to provide their own delivery services. We began deploying the “delivery features” of our mobile platform to selected
customers on a trial basis during the fourth quarter of fiscal 2019.
During the quarter ended May 31, 2020
and continuing through the date of this Report, we have continued to enhance the user experience and functionality around the
scheduling and shift intermediation functions and to provide a “white label” last mile delivery solution for our restaurant
customers. We believe that these features represent key improvements to our platform, and will be in high demand from restaurants
hit hard by the COVID-19 crisis. The scheduling solution provides a management tool to address employee turnover in nearly real
time from a readily available and trained employee population. The delivery solution provides customers the ability to use their
own personnel to make deliveries in a time when many restaurants are currently limited to walk-up takeout and third-party delivery
sales due to the COVID-19 pandemic.
The final phase of our initial platform
consists of our “shift intermediation” functionality, which will enable our WSE shift workers to receive information
regarding and accept available shift work opportunities. The utility of the intermediation functionality depends significantly
upon the presence of meaningful numbers of available workers and client shift opportunities in the same geographic region, as well
as significant customer adoption taking advantage of this concentrated presence. We believe that we attained such a level of geographical
concentration in Southern California during fiscal 2019, which allowed us to activate these key features in August 2019 to a limited
group of customers on a test basis. These test basis deployment efforts have generated significant business knowledge, which our
marketing and engineering teams were able to implement in developing key enhancements and process flow improvements beginning during
our November 2019 fiscal quarter, and continuing through the present. We are currently developing these additional enhancements
simultaneously with our collection of additional customer and WSE scheduling information.
Our goal is to provide a mature and robust hosted, cloud-based HRIS platform, coupled with a seamless
and technically sophisticated App, that will act as both a revenue generation system
as well as a “viral” customer acquisition engine through the combination of the scheduling, delivery, and intermediation
features and interactions. We believe that, once a critical mass of clients and WSEs is achieved, additional shift opportunities
will be created, which will pull in additional WSEs and additional client businesses in the food service and hospitality industries.
Our approach to achieving this critical mass is to market our services to restaurant owners and franchisees, focusing on specific
brands and geographical locations. We hope to promote viral adoption of our App by WSEs and clients through both geographic
concentration and adoption within franchise brands.
Our headquarters is currently situated
in Irvine, California, from which we can reach the Southern California and other markets and service our clients remotely.
We believe we will experience business
and revenue growth in the new market trend towards flexible, temporary or freelance jobs, often involving connecting with clients
or customers through an online platform (the “Gig Economy”) from the following key factors, all of which are provided
without adjustment for the impacts due to the COVID-19 pandemic:
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·
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Large Potential Market. Current
statistics show that there are over 14.7 million employees working in our current target market--the restaurant and hospitality
industries -- representing over $300 billion of annual revenues. (U.S. Department of Labor. Bureau of Labor Statistics. February
2018). Compared to the total workforce in all industries, workers in the restaurant industry have a notably higher percentage
of part-time workers. (National Restaurant Association. “News & Research: Restaurant middle class job growth 4 times
stronger than overall economy.” 13 January 2016). At our current monetization rate per employee, this represents an
annual revenue opportunity of over $9 billion per year for the United States. Our current geographic presence in California,
New York City and parts of Texas, Illinois, and Florida provides coverage of over 50% of this opportunity. Our intention is
to expand both our geographic footprint and our service offerings into other industries, particularly where part-time work
is a significant component of the applicable labor force, including the retail and health care sectors.
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·
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Positive External Market Forces. A
significant problem for small businesses and, in particular, businesses in the food service industry such as QSRs, involves
compliance with employment related regulations imposed by federal, state and local governments. These regulations include
the provisions of the Affordable Care Act and recent developments in California for Gig Economy companies such as Uber and
Lyft under California AB5 which requires these companies to treat their workers as employees rather than independent contractors.
We foresaw this change and provide a viable solution to convert contract workers into employees under our HRIS platform. We
see significant business opportunities from this development.
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·
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Rapid Rise of Independent Workers. The number of independent workers, totaling approximately 41 million in 2018, is expected to increase to 40% of the private, non-farm U.S. workforce by 2021. (MBO Partners. “America’s Independents / A Rising Economic Force / 2016 State of Independence in America Report / Sixth Annual.” 2016.). As of early 2019, approximately 48% of the U.S. workforce has worked as an independent employee either part time or on a contract basis (Source: http://www.mbopartners.com/state-of-independence).
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·
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Technology Affecting and Attitudes towards Employment Related Engagements. Gig-economy platforms have changed the way part-time workers can identify and connect to work opportunities, and millennials and others have embraced such technologies as a means to secure short-term employment related engagements. The significant increase in the adoption of smart phone devices has provided the “last mile” platform to enable technology solutions such as ours to provide a gig economy platform. Most importantly, for our target audience of 18-35 year old workers as of February 2019, 92% of these workers regularly use a smart phone (Source: Pew Research Center).
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New ShiftPixy Mobile App is Designed
to Provide Additional Benefits to Employers and NextGen Shift Workers. Millennials represent approximately 40% of the
independent workforce who are over the age of 21 and who work 15 hours or more each week. (MBO Partners. “America’s
Independents / A Rising Economic Force / 2016 State of Independence in America Report / Sixth Annual.” 2016.). Mindful
that most of its shifters will be millennials who connect with the outside world primarily through a mobile device, ShiftPixy
is poised to significantly expand its business through the ShiftPixy mobile app. The ShiftPixy mobile app is a proprietary
application downloaded to mobile devices, allowing ShiftPixy’s shifters to access shift work opportunities at all of
ShiftPixy’s clients, not just their current restaurant or hospitality provider, and, with an added feature made available
in the first calendar quarter of 2020, also allows shift employees not working at its clients to access shift work opportunities
at all of its clients.
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ShiftPixy and its subsidiary, RT, collectively served, as of
May 31, 2020, an aggregate of 81 clients with 252 client locations comprising approximately 2,700 employees. None of these clients
represented more than 10% of our revenues for the three or nine month periods ended May 31, 2020.
Significant Developments in the Nine
Months Ended May 31, 2020.
Impact of COVID-19:
Our business, results of operations and financial condition
has been, and may continue to be, materially adversely impacted by public health epidemics, including the recent outbreak of respiratory
illness caused by COVID-19 first identified in Wuhan, China in December 2019. Beginning
in February 2020, we began to see a reduction in weekly per location billings for our restaurant customers. On March 11,
2020, the World Health Organization declared COVID-19 a pandemic disease. Potential impacts of the spread of COVID-19 include disruptions
or restrictions on our employees’ and WSEs’ ability to travel and temporary closures of the facilities of our clients.
For example, many of our WSEs perform services in the restaurant and hospitality industries, and since early March 2020, there
has been significant decline in restaurant and hotel traffic. Government agencies have since declared a state of emergency in the
U.S., and some have restricted movement, required restaurant, bar and hotel closures, and advised people not to visit restaurants
or bars and otherwise restrict non-essential travel. In some jurisdictions, people have been instructed to shelter in place to
reduce the spread of COVID-19, in response to which restaurants have temporarily closed and have shifted operations at others to
provide only take-out and delivery service. Travel and tourism across the globe has significantly decreased, in response to which
hotels have temporarily closed and furloughed employees. All of these developments and similar developments that have occurred
as a result of the spread of COVID-19 negatively affect our clients and the ability of our WSEs to perform services. As a result,
we expect our results of operations to continue to be materially and negatively affected by these actions.
Additionally, our headquarters is located
in Irvine, CA in Orange County, a region that has seen a recent rise of confirmed cases of COVID-19. During most of the quarter
ended May 31, 2020, substantially all of our corporate employees were working remotely. Beginning in May 2020, we began to allow
select employees to return to work in our corporate offices on a limited basis through partial on-site scheduling and in compliance
with State of California and Orange County directives on COVID-19 safety, including the use of face masks, social distancing, temperature
checks, and hand sanitization requirements. We are continuing to monitor and assess the effects of the COVID-19 outbreak on our
commercial operations, including any potential impact on our revenue in fiscal 2020. However, we cannot at this time accurately
predict what effects these conditions will ultimately have on our operations due to uncertainties relating to the ultimate geographic
spread of the virus, the severity of the disease, the duration of the outbreak, and the length of the travel restrictions and business
closures imposed by the governments of impacted countries. In addition, a significant outbreak of contagious diseases in the human
population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries,
resulting in an economic downturn that could affect demand for our products and likely impact our operating results.
We do not, yet, know the impact that COVID-19 will have on our
business in the medium to long term. Up to the date of this Report, we have experienced the following COVID-19 impacts to our business:
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We have seen significant staffing reductions for our Southern California clients since the state lockdown in mid-March and a resultant reduction in payroll billings from those clients. Several of our clients have closed operations either temporarily or permanently and most have furloughed staff or reduced hours.
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We are working closely with our clients to provide additional
capital including through the 2020 stimulus programs such as the Payroll Protection Plan, but we have not, as yet, seen a recovery
of billings from any of the stimulus programs.
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We have seen a significant increase in potential customers
needing the technology solutions we provide and our business activities have been marked by an increase in our sales pipeline
for our delivery and scheduling application features and an increase for franchised restaurant customers. During the May 2020
quarter, we closed additional client business and began to bill additional client locations resulting in a net increase of
approximately 60 client locations billed, or approximately 23% compared to the February 29, 2020 quarter but our per location
monthly billings decreased by approximately 38% from February 2020 to May 2020, we believe due significantly to the COVID-19
pandemic. Our additional billings from these new client locations have not been sufficient to offset the gross payroll
billings reduction from February 2020 to May 2020, and we cannot we predict to what extent, if any, this increase in
potential customers will result in additional signed contracts and increased revenues.
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We have experienced increases in our workers compensation reserve
requirements, and we expect additional workers compensation claims to be made by furloughed employees. We also expect additional
workers compensation claims to be made by employees required to work by their employers during the COVID-19 pandemic. On May 4,
2020, the State of California indicated that workers who became ill with COVID-19 would have a potential claim against workers
compensation insurance for their illnesses. We expect additional workers compensation claims to be made by employees required to
work by their employers during the COVID-19 pandemic, which could have a material impact on our workers compensation liability
estimates. While we have not seen additional expenses as a direct result of any such potential claims to date, and we have
received no claims through June 30, 2020 representing claims related to COVID-19, we have seen an increase in the workers compensation
reserve calculations for both our continuing and discontinued operations. The additional expenses for the three and nine months
ended May 31, 2020 are due primarily to mitigation of COVID-19 risk. We will continue to closely monitor all workers compensation
claims made during the COVID-19 pandemic.
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Our application development cycle has been delayed. Our
internal development team, located in Irvine, CA, was subject to lockdown for significantly all of the quarter ended May 31, 2020,
and the work schedules of our external project development teams in other locations were also impacted by the COVID-19 pandemic. All
groups were forced to work remotely, and travel was restricted, disrupting the normal development project cycles and management
review of our external teams. Our development teams typically have a high degree of direct person to person interaction as part
of the creative and problem-solving processes inherent in the development and integration of new technologies. This
person to person interaction was significantly reduced during the quarter ended May 31, 2020 and resulted in delays in the development,
testing, and deployment of our key development initiatives.
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Vensure Asset Sale
On January 3, 2020, we entered
into an asset purchase agreement with Shiftable HR Acquisition, LLC, part of Vensure, that assigned client contracts representing
approximately 88% of quarterly revenue as of November 30, 2019, including 100% of its existing PEO business effective as of December
31, 2019, and the transfer of $1.6 million of working capital assets, including cash balances and certain operating assets associated
with the assigned client contracts included in the agreement. Gross proceeds from the Asset Sale were $19.2 million, of which $9.7
million was received at closing and $9.5 million will be paid out in equal monthly payments for the next four years after certain
transaction conditions are met, primarily consisting of a minimum level of gross profit generated from the transferred business
subject to adjustments for working capital transfers. During the three months ended May 31, 2020, we estimated $0.7 million of
working capital adjustments, recorded as an increase in the note receivable, and we recorded no adjustments for the gross profit
guarantee during the three months ended May 31, 2020.
The Asset Sale required a 90 day settlement
period for the contract assets and liabilities. Due to disruptions from COVID-19, the settlement period has been informally extended.
We will not begin to receive any additional proceeds until the settlement has been completed. We expect to resolve the settlement
period during the fiscal quarter ending August 31, 2020.
Revised Customer Focus
Beginning
in June 2019, we refocused our sales efforts towards clients that were better suited to take advantage of our HRIS and mobile application
benefits including, the functions we believe will result in additional revenues and gross margins, and carry a reduced cost of
operations support both from our internal customer support team and from sales commissions. We hired additional internal sales
personnel to focus on those client opportunities and we are moving away from our prior sales model, which utilized highly commissioned
sales personnel paid on a recurring percentage of customer billings. Those internal sales personnel were fully trained in September
2019 and their efforts began to bear positive results shortly thereafter, resulting in customer wins in October, with expected
onboarding beginning in 2020.
We believe our new sales model
is better served to incentivize our sales and marketing personnel to acquire those customers that benefit from the HRIS value proposition
and will result in both increased revenues and profitability. We also reviewed our legacy customers after this refocus, as well
as during the due diligence process for the Asset Sale that closed in January 2020, and identified those customers with limited
potential to benefit from our “upsell” HRIS model. Those customers who did not fit our revised profile were primarily
selected to be included in the Asset Sale assignment.
Software Development
Prior to March 2019, we primarily
used turnkey contract software development firms to build the software code, mobile application, and license integrations
required to build the functional solution, and our internal personnel had a primarily oversight role. Beginning in March
2019, we hired and assembled an internal development team for cost-cutting and for better feature and implementation control.
Our development team was fully in place by August 2019 and focused on delivering a version of our mobile app and software
solution using a combination of third-party licensed software and internally developed software.
We began building our internal software
development team and transitioned away from our former software development vendor to expedite our technology deployment. The tardy
delivery of the user features from our previous software development vendor and related on-going litigation slowed the pace of
our growth. The completion of our technology and the deployment of these features will further accelerate our growth. We launched
version 2.0 of its App and enhanced user features, including onboarding, scheduling and driver management, during the fourth calendar
quarter of 2019. We believe that the continuing release and update of these features will further accelerate the growth of our
business and move us closer to our financial breakeven point.
We continued our software development internally
during the second quarter of fiscal 2020 primarily through feature enhancements such as delivery, scheduling, and onboarding functionality
improvement, and better integration and more seamless process flow improvements. We believe that this has resulted in an improved
user experience, reduced internal staff time required for onboarding, and increased trials of our future revenue generation features
such as delivery and scheduling. Our software development during the quarter ended May 31, 2020 continued to focus on enhanced
delivery and intermediation functionality, but was disrupted due to inefficiencies caused by the COVID-19 lockdown, impacting personnel
located in our Irvine, CA headquarters as well as our external development teams.
From inception of the project in 2017 through May 31, 2020,
we spent approximately $20.3 million, consisting of outsourced research and development, IT related expenses, development contractors
and employee costs, as well as marketing spending consisting of advertising, trade shows, and marketing personnel costs.
The following table shows the technology
and marketing spending for each period reported:
Development spending (in
$ millions)
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Nine Months
ending
May 31, 2020
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Nine Months
ending
May 31, 2019
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(unaudited)
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(unaudited)
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Contract development and licenses
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$
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1.3
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$
|
1.5
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Internal personnel costs
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1.5
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|
0.5
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Total Development spending
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$
|
2.8
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|
|
$
|
2.0
|
|
|
|
|
|
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|
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Marketing spending
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|
|
|
|
|
|
|
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Advertising and Outside Marketing
|
|
$
|
0.4
|
|
|
$
|
1.0
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Internal personnel costs
|
|
|
0.2
|
|
|
|
0.1
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Subtotal, Marketing costs
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$
|
0.6
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|
$
|
1.1
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Total, HRIS platform and mobile application spending
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$
|
3.4
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$
|
3.1
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Cumulative Investment
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$
|
20.3
|
|
|
|
13.8
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Portion of investment capitalized as fixed assets
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$
|
3.2
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|
|
|
0.5
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Portion of investment expensed
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$
|
17.1
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13.3
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For
the three months ended May 31, 2020 and May 31, 2019, and included in the table above as development spending, we capitalized $0
and $0.5 million, respectively, of development spending into fixed assets.
The mobile app is one of the software
components of what we call the mobile platform and, together with the ShiftPixy “Command Hub” and the client portal,
is being developed, tested and released in stages. We have released and are currently using the onboarding feature of our software,
which enables us to capture all application process-related data regarding our assigned employees, while introducing and integrating
them into the ShiftPixy Ecosystem. Our new employees are no longer required to fill out the burdensome pile of typical onboarding
paperwork. By leveraging advanced algorithmic capabilities, new hires are guided through the onboarding process by a “Pixy”
chatbot that asks the necessary questions and generates the required employment documents in a highly personal and engaging way.
Under certain licensing agreements, we
launched version 2.0 of its app and enhanced user features (onboarding, scheduling and intermediation) during the fourth calendar
quarter of 2019, with all user features as well as the driver management to selected customers on a test basis. The development
team used the experience from these real-world test cases to further enhance the process flows, usability, and user experience
for the mobile app and accompanying desktop application software during the second quarter of fiscal 2020. We believe that the
feature enhancements such as delivery, scheduling, and onboarding functionality improvement, and better integration and more seamless
process flow improvements resulted in an improved user experience, reduced internal staff time required for onboarding, and increased
trials of our future revenue generation features such as delivery and scheduling. Our technology platform is now live as of the
date of this Report. We did not charge for the delivery, intermediation, or scheduling functionality through the three months ended
May 31, 2020. We are currently evaluating these tools to better monetize the technology platform.
Following completion of the questions,
applicable onboarding paperwork is prepopulated with the data and prepared for the employee’s signature to be affixed digitally
via the App as well. We use the App to gather required compliance documents such as I-9 required documentation.
Nasdaq Delisting Notice Resolution
On June 6, 2019, we received two letters
from the Listing Qualifications Associate Director of Nasdaq notifying us of our failure to meet the listing rules of Nasdaq.
The first letter noted that our securities
had failed to maintain a minimum bid price of $1.00 per share for the prior 30 consecutive business days. The letter noted that
we would have an additional 180 calendar days to regain compliance.
The second letter noted that our securities
had failed to maintain either: i) a minimum market value of listed securities of $35 million for the prior 30 consecutive business
days, ii) a minimum shareholders’ equity of $2.5 million, or iii) $0.5 million of income from continuing operations. The
letter noted that we had an additional 180 calendar days to regain compliance with one of these three criteria.
On December 4, 2019, we received a letter
from Nasdaq notifying us of its intent to schedule our securities for delisting from Nasdaq at the opening of business on December
13, 2019, and the intent to file a Form 25-NSE with the SEC, subject to our right to file an appeal and present a compliance plan
at a hearing in front of the Nasdaq Hearings Panel. We requested a hearing and received a letter from Nasdaq on December 10, 2019,
notifying us that a hearing had been scheduled for January 23, 2020.
On December 17, 2019, we received a letter
from Nasdaq stating that the Company no longer met the minimum of 500,000 publicly held shares. Between January 1, 2020 and March
23, 2020, we issued sufficient shares to satisfy this minimum requirement.
We provided a response to Nasdaq on January
13, 2020, of our plans to regain compliance, including pro forma calculations of our minimum shareholders’ equity in excess
of $2.5 million due to the Asset Sale and our expected convertible note settlements and conversions, which occurred later in January
2020. The Nasdaq hearing referred to above was conducted on January 23, 2020, where we presented our plans to regain compliance.
In April 2020, we received notification by telephone of the hearing outcome, namely that our January 2020 transactions had satisfied
the minimum shareholders’ equity requirement, and directing us to document this result by filing a Current Report on Form
8-K. The Company received a formal notice from Nasdaq on May 7, 2020, that we were in compliance with all listing requirements,
and that the matter has been closed.
Financing Activities:
During the nine months ended
May 31, 2020, the Company successfully recapitalized through a combination of a $12.0 million underwritten public offering, and
settlement, repayment, or conversion of all convertible notes. As of May 31, 2020, we have no convertible debt and no options or
warrants outstanding that carry dilutive provisions.
The May 2020 Public Offering
On May 20, 2020, we entered into an underwriting
agreement with A.G.P. in connection with the May 2020 Offering of an aggregate of (i) 1,898,850 shares of our common stock, (ii)
the Pre-Funded Warrants to purchase 323,310 shares of common stock and (iii) warrants to purchase 1,277,580 shares of common stock
(the “Common Warrants”), which included the partial exercise of A.G.P.’s over-allotment option to purchase 166,500
additional Common Warrants.
Each share of common stock and Pre-Funded
Warrant sold in the May 2020 Offering was sold together with a Common Warrant as a fixed combination, with each share of common
stock and Pre-Funded Warrant sold being accompanied by a Common Warrant to purchase 0.5 shares of common stock. The shares of common
stock and accompanying Common Warrants were sold at a price to the public of $5.40, less underwriting discounts and commissions
and the Pre-Funded Warrants and accompanying Common Warrants were sold at a price to the public of $5.399, less underwriting discounts
and commissions. The Common Warrants were immediately exercisable and will expire on May 26, 2025 and have an exercise price of
$5.40 per share, subject to anti-dilution and other adjustments for certain stock splits, stock dividends, or recapitalizations.
We closed the May 2020 Offering on May
26, 2020 for gross proceeds of approximately $12.0 million, prior to deducting $1.7 million of costs consisting of underwriting
discounts and commissions and offering expenses payable by us, which includes a partial exercise of the underwriter’s over-allotment
option to purchase additional Common Warrants. All Pre-Funded Warrants issued or issuable were exercised on the closing date of
May 26, 2020.
On June 11, 2020 we closed an over-allotment option from the
May 2020 Offering for additional gross proceeds of approximately $0.9 million, prior to deducting underwriting discounts and commissions
and offering expenses payable by us, representing the partial exercise of A.G.P.’s over-allotment option to purchase 250,340
shares of common stock at $5.40 per share.
On July 7, 2020, we closed an over-allotment option from the
May 2020 Offering for additional gross proceeds of approximately $0.45 million, prior to deducting underwriting discounts and
commissions and offering expenses payable by us, representing the partial exercise of A.G.P.’s over-allotment option to
purchase 83,840 shares of common stock at $5.40 per share.
Convertible Note Settlements,
Amendments, and Related Litigation Settlements and Resolution
During the nine months ended
May 31, 2020, the Company settled, converted, or repaid all of the $6.8 million of convertible note principal outstanding as of
August 31, 2019 and resolved all related litigation, as follows:
March 2019 Note Exchange
On December 5, 2019, we entered into an
exchange agreement with the holder of a majority of its March 2019 Notes. The exchange agreement and the related revised March
2019 note agreement revised the conversion price to $40.00 per share, extended the term of the March 2019 Notes to March 1, 2022,
provided for a revised quarterly amortization schedule beginning April 1, 2020, and removed certain anti-dilution terms of the
related March 2019 Warrants. The holder also exchanged $222,000 of December 2018 Notes by extending the term to coincide with the
revised term of the March 2019 Notes and the revised amortization schedule. We agreed to issue an additional $200,000 of consideration
to the holder, payable in common stock, as consideration for this exchange.
In January 2020, we settled or
resolved all of its convertible note litigation as follows:
|
·
|
In January 2020, Alpha Capital received a judgment of $500,000
plus accrued interest on their litigation claim, representing March 2019 Note principal of $310,000 plus $190,000 of damages. We
resolved the Alpha litigation by converting their remaining balance of the June 2018 Notes and December 2018 Notes in full by issuing
45,211 shares and paying the damages in cash.
|
|
·
|
On January 17, 2020, the Company settled all claims with MEF I and
repaid all note principal remaining, accrued damages, and accrued interest with the conversion of $244,000 of June 2018 Note principal
and payment of $725,000 in cash.
|
|
·
|
On January 22, 2020, we settled all claims with Dominion Capital
and repaid all note principal remaining, accrued damages, and accrued interest with the conversion of $1,020,000 of Note Principal
and payment of $1,322,000 in cash representing $472,000 of note principal and $849,000 of interest and default penalties.
|
March 2020 Warrant and Note Exchanges
and Conversions
Between March 1, 2020 and March 22, 2020,
three investors converted $1,047,000 of our Senior Convertible Notes and $25,000 of accrued default interest into 135,507 shares
of common stock at a conversion price of $9.20 per share. These conversions resulted in an acceleration of $0.4 million for the
unamortized note discount and deferred financing fees, recorded as a loss on debt conversion.
Between March 23, 2020 and March 24, 2020,
we amended or exchanged all remaining convertible notes payable and eliminated all remaining warrants with dilutive protection
as follows:
On March 23, 2020, we entered into the
Amendment and Exchange Agreements with certain institutional investors, the Amended and Restated Notes pursuant to which we amended
and restated certain existing March 2019 Notes including the capitalization of $59,000 of accrued default interest and issued (i)
Exchange Notes convertible notes in an aggregate principal amount of $167,000 convertible into shares of common stock at a conversion
price of $9.20 per share of common stock, (ii) the Exchange Warrants to purchase an aggregate of 162,950 shares of common stock
at an exercise price of $10.17 per share of common stock and (iii) an aggregate of 82,654 shares of common stock:
|
·
|
On March 23, 2020, we entered into an Amendment and Exchange
Agreement with Alpha pursuant to which we (a) issued to Alpha an Amended and Restated Note in an aggregate principal amount of
$723,000, including capitalization of $51,000 of accrued default interest, and (b) in exchange for outstanding warrants to purchase
shares of common stock held by Alpha, issued to Alpha (i) 66,123 shares of common stock, (ii) March 2020 Exchange Warrants to purchase
130,360 shares of common stock and (iii) a March 2020 Exchange Note in an aggregate principal amount of $145,000.
|
|
·
|
On March 23, 2020, we entered into an Amendment and Exchange
Agreement with Osher pursuant to which we (a) issued to Osher an Amended and Restated Note in an aggregate principal amount of
$108,000, including the capitalization of $8,000 of accrued default interest and (b) in exchange for outstanding warrants to purchase
shares of common stock held by Osher, issued to Osher (i) 16,531 shares of common stock, (ii) March 2020 Exchange Warrants to purchase
32,590 shares of common stock and (iii) a March 2020 Exchange Note in an aggregate principal amount of $22,000.
|
On March 24, 2020, we entered into the
Exchange Agreement with CVI pursuant to which CVI exchanged its outstanding senior convertible note
due 2022 for (i) the CVI Exchange Warrant and the March 2020 Exchange Warrants to purchase 260,719 shares of common stock and (b)
the CVI Exchange Note and March 2020 Exchange Notes in an aggregate principal amount of $1,829,000 convertible into shares of common
stock at a conversion price of $9.20 per share.
We evaluated the March 2020 Agreements
as an exchange under ASC 470 and determined that the exchanges should be treated as debt extinguishments and reissuances. We accelerated
the remaining unamortized discount and deferred financing fees as of the date of the exchange and recorded the fair value of the
shares issued in exchange for the warrants cancelled as a loss on exchange of $1,592,000. We valued the revised conversion features
of the Amended and Restated Notes, the March 2020 Exchange Notes and the March 2020 Exchange Warrants using the binomial method
and recorded a discount of $2,825,000 on the exchange dates.
April and May 2020 Conversions
On April 15, 2020, CVI converted their
remaining $1,829,000 notes outstanding into 198,756 shares of common stock.
On May 22, 2020, Alpha and Osher converted
their remaining $997,000 notes outstanding into 108,321 shares of common stock.
The April and May 2020 conversions represented the remaining
principal outstanding and accelerated the unamortized note discount, resulting in a loss on conversion of $2.4 million for the
three and nine months ended May 31, 2020.
Performance Highlights
Q2 FYE 2020 vs. Q2 FYE 2019 (continuing
operations)
|
·
|
Served approximately
81 clients and co-employed an average of 2,700 WSEs, a 106% increase in average
WSEs compared to the same period in FYE 2019, and
|
|
|
|
|
·
|
Processed approximately $14.4 million in gross billings, an increase of 21.3% over the same period in FYE 2019
|
|
|
|
|
·
|
Gross
profit was impacted by additional workers compensation reserves recorded due to the COVID-19 pandemic
|
Our financial performance for the three
months ended May 31, 2020, compared to the three months ended May 31, 2019, included the following:
Revenues
increased 23.0% to $2.0 million resulting from increased number of WSEs we are currently servicing.
Cost
of Revenue increased 27.7% to $1.9 million due to increased number of WSEs we are currently servicing and increased
workers compensation reserve requirements due to the COVID-19 pandemic.
Operating
expenses increased by 2.2% to $4.6 million in the three months ended May 31, 2020, from $4.5 million in the three months
ended May 31, 2019. The increase was driven by payroll related expenses increased due to the hiring of our technical team in Q3
of fiscal 2019, offset by decreased G&A related expenses and professional fees.
Operating
Loss increased by 4.6% to $4.5 million in the three months ended May 31, 2020, from $4.3 million in the three months
ended May 31, 2019. The increase was due to increased operating expenses.
Sequentially, compared to the February
29, 2020 quarter, our revenues decreased $0.6 million, or 23.1%, and our customer billings decreased $1.6 million, or 11.1%, due
to the decrease in payroll processed as a result of the COVID-19 pandemic. Our average monthly billed WSE count decreased by 18.5%,
from 3,200 at the end of February 2020, to 2,700 at the end of May 2020. We are closely monitoring our billed WSE count, fluctuations
of which correlate closely to the impact of COVID-19 pandemic shutdowns and re-openings on businesses in Southern California.
During the quarter, we observed an increase in billed WSEs through the middle of March, which was in line with our second quarter
growth trajectory. In mid-March, the State of California implemented a lockdown that resulted in an approximate 20% decrease in
billed WSEs by the end of April 2020, compared to our billed WSE count as of the end of the last fiscal quarter. Our billed WSE
count rebounded significantly in May 2020, however, to approximately 85% of the levels observed as of February 29, 2020, and approximately
75% of the levels observed just prior to the lockdown in Southern California, our current primary market. We continued to recover
in June 2020 and billed an average of 3,200 WSEs, which represents approximately the same levels as the pre-COVID figures for
February 2020, and reflects the net effect of customer location growth in numbers offset by customer losses and lower per location
billings during the quarter.
During the May 31, 2020 quarter, we evaluated
our workers compensation reserves for both our continuing and discontinued operations retained subsequent to the Asset Sale. As
a result of increased reserve rate requirements, we recorded approximately $1.8 million of additional reserves, consisting of $0.3
million for continuing operations and $1.5 million for discontinued operations. While we have had no COVID-19 workers compensation
claims through June 30, 2020, we continue to monitor closely all workers compensation claims, and we intend to pass through our
increased workers compensation reserves to our customers, on a pro forma basis, through increased rates.
For the quarter ended May 31, 2020, gross profit from continuing
operations was $141,000 or 7.0% of revenues, a decrease from the prior period ending May 31, 2019, of $171,000 or 10.4% of revenues,
as well as a decrease of 17.8% from the $459,000 recorded in revenues for the quarter ended February 29, 2020. But for the increased
workers compensation reserves recorded, as discussed above, profit from continuing operations for the quarter ended May 31, 2020
would have increased to $416,000, or 20.7% of revenues.
Discontinued
Operations and Other
Other income/expenses increased to a $10.5 million loss
for the quarter ended May 31, 2020 from a loss of $1.9 million for the quarter ended May 31, 2019, reflecting approximately $5.0
million of losses associated with our convertible notes and related securities including non-cash and cash interest,
accelerations on note repayments and conversions, and “net of” gains associated with the mark to market of our derivative
liabilities, as well a non-recurring, non-cash expense related to the valuation of the preferred option exchange of $5.4 million
discussed above.
Income
from discontinued operations was a $1.5 million loss, representing the additional accrual for loss estimates on the
remaining workers compensation claims reserves for the quarter ended May 31, 2020, and a $1.2 million income from the discontinued
operations of the Vensure business for the quarter ended May 31, 2019.
Net
Profit/Loss increased to a $70.5 million loss, or $2.63 per diluted share, from a $5.0 million loss, or $6.41 per diluted
share, in the prior period. The increase was due to charges related to our recapitalization related to preferred options and convertible
notes and resulting in non-recurring other expenses of 64.5 million, a $62.6 million increase,and a difference of $2.7 million
in gain/loss on discontinued operations. Excluding these non-recurring charges, our non-GAAP adjusted net loss for the quarter
ended May 31, 2020 was $6.1 million, or $0.23 adjusted net loss per diluted share. See also non-GAAP Adjusted Net Income below.
Results
of Operations
The following table summarizes the condensed consolidated results
of our operations for the three and nine months ended May 31, 2020, and 2019 (unaudited).
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
May 31, 2020
|
|
|
May 31, 2019
|
|
|
May 31, 2020
|
|
|
May 31, 2019
|
|
Revenues (gross billings of $14.4 million and $11.9 million less worksite employee payroll cost of $12.4 million and $10.3 million, respectively for the three months ended; gross billings of $47.0 million and $25.9 million less worksite employee payroll cost of $40.3 million and $22.3 million, respectively for nine months ended)
|
|
$
|
2,014,000
|
|
|
$
|
1,638,000
|
|
|
$
|
6,775,000
|
|
|
$
|
3,658,000
|
|
Cost of revenue
|
|
|
1,873,000
|
|
|
|
1,467,000
|
|
|
|
6,051,000
|
|
|
|
3,126,000
|
|
Gross profit
|
|
|
141,000
|
|
|
|
171,000
|
|
|
|
724,000
|
|
|
|
532,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages, and payroll taxes
|
|
|
1,793,000
|
|
|
|
1,152,000
|
|
|
|
5,246,000
|
|
|
|
3,182,000
|
|
Stock-based compensation – general and administrative
|
|
|
150,000
|
|
|
|
(5,000
|
)
|
|
|
895,000
|
|
|
|
154,000
|
|
Commissions
|
|
|
27,000
|
|
|
|
64,000
|
|
|
|
137,000
|
|
|
|
130,000
|
|
Professional fees
|
|
|
439,000
|
|
|
|
1,280,000
|
|
|
|
2,276,000
|
|
|
|
2,799,000
|
|
Software development
|
|
|
686,000
|
|
|
|
222,000
|
|
|
|
1,390,000
|
|
|
|
1,249,000
|
|
Depreciation and amortization
|
|
|
545,000
|
|
|
|
222,000
|
|
|
|
1,025,000
|
|
|
|
603,000
|
|
General and administrative
|
|
|
1,054,000
|
|
|
|
1,541,000
|
|
|
|
2,617,000
|
|
|
|
3,654,000
|
|
Total operating expenses
|
|
|
4,694,000
|
|
|
|
4,476,000
|
|
|
|
13,586,000
|
|
|
|
11,771,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss
|
|
|
(4,553,000
|
)
|
|
|
(4,304,000
|
)
|
|
|
(12,862,000
|
)
|
|
|
(11,239,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(559,000
|
)
|
|
|
(4,345,000
|
)
|
|
|
(2,524,000
|
)
|
|
|
(6,270,000
|
)
|
Expense related to preferred option exchange
|
|
|
(62,091,000
|
)
|
|
|
-
|
|
|
|
(62,091,000
|
)
|
|
|
-
|
|
Expense related to modification of warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
(22,000
|
)
|
|
|
-
|
|
Loss from debt conversion
|
|
|
(2,842,000
|
)
|
|
|
-
|
|
|
|
(3,500,000
|
)
|
|
|
-
|
|
Inducement loss
|
|
|
(57,000
|
)
|
|
|
(2,273,000
|
)
|
|
|
(624,000
|
)
|
|
|
(3,829,000
|
)
|
Loss on debt extinguishment
|
|
|
(1,592,000
|
)
|
|
|
-
|
|
|
|
(1,592,000
|
)
|
|
|
-
|
|
Change in fair value derivative and warrant liability
|
|
|
6,000
|
|
|
|
4,748,000
|
|
|
|
1,777,000
|
|
|
|
4,748,000
|
|
Loss on convertible note settlement
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,611,000
|
|
Gain on convertible note penalties accrual
|
|
|
-
|
|
|
|
-
|
|
|
|
760,000
|
|
|
|
-
|
|
Total other (expense) income
|
|
|
(67,135,000
|
)
|
|
|
(1,870,000
|
)
|
|
|
(67,816,000
|
)
|
|
|
(2,740,000
|
)
|
Loss from continuing operations
|
|
|
(71,688,000
|
)
|
|
|
(6,174,000
|
)
|
|
|
(80,678,000
|
)
|
|
|
(13,979,000
|
)
|
Income (Loss) from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from discontinued operations
|
|
|
(1,490,000
|
)
|
|
|
1,178,000
|
|
|
|
(1,293,000
|
)
|
|
|
4,596,000
|
|
Gain from asset sale
|
|
|
-
|
|
|
|
-
|
|
|
|
15,682,000
|
|
|
|
-
|
|
Total Income (Loss) from discontinued operations, net of tax
|
|
|
(1,490,000
|
)
|
|
|
1,178,000
|
|
|
|
14,389,000
|
|
|
|
4,596,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(73,178,000
|
)
|
|
$
|
(4,996,000
|
)
|
|
$
|
(66,289,000
|
)
|
|
$
|
(9,383,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) gain per share, Basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(2.73
|
)
|
|
$
|
(7.92
|
)
|
|
$
|
(5.49
|
)
|
|
$
|
(18.54
|
)
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(0.06
|
)
|
|
|
1.51
|
|
|
|
(0.09
|
)
|
|
|
6.10
|
|
Gain on sale of assets
|
|
|
-
|
|
|
|
-
|
|
|
|
1.07
|
|
|
|
-
|
|
Total discontinued operations
|
|
|
(0.06
|
)
|
|
|
1.51
|
|
|
|
0.98
|
|
|
|
6.10
|
|
Net income (loss) per share of common stock – Basic and diluted
|
|
$
|
(2.79
|
)
|
|
$
|
(6.41
|
)
|
|
$
|
(4.51
|
)
|
|
$
|
(12.44
|
)
|
Revenue
for the three months ended May 31, 2020, increased by $0.4 million, or 25.0%, to $2.0 million, compared to $1.6 million for the
three months ended May 31, 2019. Revenue for the nine months ended May 31, 2020 increased by $3.1 million, or 83.8%, to $6.8 million,
compared to $3.7 million for the nine months ended May 31, 2019.
Gross billings are a non-GAAP measurement
and are the metric in which we currently earn our revenue. Gross billings for the three months ended May 31, 2020, were earned
from billings to clients to whom we provide staff or workforce management support. Gross billings for the three months ended May
31, 2020, increased by $2.5 million, or 21.3%, to $14.4 million, compared to $11.9 million for the three months ended May 31, 2019.
Gross billings for the nine months ended May 31, 2020, increased by $21.1 million, or 81.5%, to $47.0 million compared to $25.9
million for the nine months ended May 31, 2019.
The payroll cost of our WSEs accounted
for 86.0% and 86.2% of our gross billings for the three months ended May 31, 2020 and May 31, 2019, respectively. As such, the
mark-up components accounted for 14.0% and 13.8% of our gross billings for the three months ended May 31, 2020 and May 31, 2019,
respectively.
The payroll cost of our WSEs accounted for 85.6% and 85.9%
of our gross billings for the nine months ended May 31, 2020 and May 31, 2019, respectively. As such, the mark-up components of
accounted for 14.4% and 14.1% of our gross billings for the nine months ended May 31, 2020 and May 31, 2019, respectively.
The increase in revenue was primarily due
to an increase in WSEs from a billed average of 1,650 employees in the three months ended May 31, 2019 to a billed average of 2,700
employees in the three months ended May 31, 2020. Revenues are recognized ratably over the payroll period as WSEs perform their
service at the client worksite.
Cost
of Revenues mainly includes the costs of employer-side taxes and workers compensation insurance coverage and employee
benefits. Our cost of revenues for the three months ended May 31, 2020, increased by $0.4 million, or 27.7%, to $1.9 million compared
to $1.5 million in the three months ended May 31, 2019. Our cost of revenues for the nine months ended May 31, 2020, increased
by $2.9 million, or 93.6%, to $6.1 million compared to $3.1 million in the nine months ended May 31, 2019.
The increase in cost of revenue can be
attributed to the additional WSEs we are servicing, which increased by 1,050 from a billed average of 1,650 employees for the three
months ended May 31, 2019, to a billed average of 2,700 employees for the three months ended May 31, 2020. Cost of revenue for
the three and nine months ended May 31, 2020 included $0.2 million in additional expense for workers compensation reserves as a
result of the COVID-19 loss reserve increase requirements.
Gross
Profit decreased 17.5% to $141,000 for the three months ended May 31, 2020 from $171,000 for the three months ended
May 31, 2019. The gross profit, as a percentage of revenues, decreased from 10.5% for the three months ended May 31, 2019, to 7.0%
for the three months ended May 31, 2020.
Gross Profit increased 36.1% to $724,000
for the nine months ended May 31, 2020 from $532,000 for the nine months ended May 31, 2019. The gross profit, as a percentage
of revenues, decreased from 14.5% for the nine months ended May 31, 2019, to 10.7% for the nine months ended May 31, 2020.
Such changes to our gross profit as a percent of revenue is
attributable to changes in paid losses and the development of open workers compensation claims during the period, primarily related
to the increased reserve requirements as a result of the COVID-19 pandemic.
Operating Expenses
The following table presents certain information
related to our operating expenses (unaudited)
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
May 31, 2020
|
|
|
May 31, 2019
|
|
|
May 31, 2020
|
|
|
May 31, 2019
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages, and payroll taxes
|
|
$
|
1,793,000
|
|
|
$
|
1,152,000
|
|
|
$
|
5,246,000
|
|
|
$
|
3,182,000
|
|
Stock-based compensation – general and administrative
|
|
|
150,000
|
|
|
|
(5,000
|
)
|
|
|
895,000
|
|
|
|
154,000
|
|
Commissions
|
|
|
27,000
|
|
|
|
64,000
|
|
|
|
137,000
|
|
|
|
130,000
|
|
Professional fees
|
|
|
439,000
|
|
|
|
1,280,000
|
|
|
|
2,276,000
|
|
|
|
2,799,000
|
|
Software development
|
|
|
686,000
|
|
|
|
222,000
|
|
|
|
1,390,000
|
|
|
|
1,249,000
|
|
Depreciation and amortization
|
|
|
545,000
|
|
|
|
222,000
|
|
|
|
1,025,000
|
|
|
|
603,000
|
|
General and administrative
|
|
|
1,054,000
|
|
|
|
1,541,000
|
|
|
|
2,617,000
|
|
|
|
3,654,000
|
|
Total operating expenses
|
|
$
|
4,694,000
|
|
|
$
|
4,476,000
|
|
|
$
|
13,586,000
|
|
|
$
|
11,771,000
|
|
Operating expenses for the three months
ended May 31, 2020, increased by $0.2 million, or 4.9%, to $4.7 million compared to $4.5 million for the three months ended May
31, 2019. The increase is due to increases in salaries of $0.6 million, stock-based compensation of $0.1 million and product development
costs of $0.5 million offset by decreases of $0.9 million in professional fees and $0.2 million of general and administrative expenses.
Operating expenses for the nine months
ended May 31, 2020, increased by $1.8 million, or 15.4%, to $13.6 million compared to $11.8 million for the nine months ended May
31, 2019. The increase is due to increases in salaries of $2.1 million, stock-based compensation of $0.7 million and product development
of $0.1 million offset by $0.6 million decrease in professional fees and $0.6 million in general and administrative expenses.
Salaries,
wages, and payroll taxes consist of gross salaries, benefits, and payroll taxes associated with our executive management
team and corporate employees. For the three months ended May 31, 2020, salaries, wages and payroll taxes increased by $0.6 million,
or 55.7%, to $1.8 million compared to $1.2 million for the three months ended May 31, 2019. For the nine months ended May 31, 2020,
salaries, wages and payroll taxes increased by $2.1 million, or 64.8%, to $5.2 million compared to $3.2 million for the nine months
ended May 31, 2019. The increase for both periods is due to the increase in corporate employees, primarily consisting of the hiring
of our internal research and development team in the third and fourth quarters of fiscal 2019.
Stock
based compensation consists of expenses related to vested stock options granted to our employees. This
compensation increased $0.2 million, or 3,257%, for the three months ended May 31, 2020, from a $5,000 credit in the three
months ended May 31, 2019, and increased $0.7 million, or 483%, to $0.9 million for the nine months ended May 31, 2020,
compared to $0.2 million for the nine months ended May 31, 2019. The three month increase was due to a one-time credit in the
May 2019 quarter and the nine month increase was due to one-time vesting of all options granted to employees transferred
under the Asset Sale.
Commissions
for the three and nine months ended May 31, 2020 and May 31, 2019 decreased less than $0.1 million for the three month period and
remained consistent at $0.1 million for the nine month period. Our sales model changed from a high commission external sales force
for the clients transferred pursuant to the Asset Sale to an inside sales force with much lower commission rates.
Professional
fees consist of legal fees, accounting and public company costs, board fees, and consulting fees. Professional fees
for the three months ended May 31, 2020, decreased by $0.9 million, or 69.6%, to $0.4 million, from $1.3 million for the three
months ended May 31, 2019. Professional fees for the nine months ended May 31, 2020, decreased by $0.6 million, or 20.5%, to $2.3
million, from $2.8 million for the nine months ended May 31, 2019. The decrease is due to lower legal fees related to litigation
matters which were resolved in January 2020.
External
software development consists of payments to third party contractors for licenses, software development, and IT related
spending for the development of our HRIS platform and mobile application. For the three months ended May 31, 2020, external software
development increased by $0.5 million, or 209.8%, to $0.7 million from $0.2 million. For the nine months ended May 31, 2020, external
software development decreased by $0.1 million, or 11.3%, to $1.4 million from $1.2 million. The increase is due to increased expenditures
related to the development of our mobile application and related HRIS platform.
Depreciation
and amortization expenses represent depreciation on our equipment and amortization on our capitalized internally developed
or purchased software. For the three months ended May 31, 2020, depreciation and amortization expenses increased by $0.3 million,
or 145.5%, to $0.5 million. For the nine months ended May 31, 2020, depreciation and amortization expenses increased by $0.4 million,
or 70.8%, to $1.0 million. The increase was due to higher software amortization, including a non-recurring write-off of $0.3 million
in the May 31, 2020 quarter.
General
and Administrative expenses for the three months ended May 31, 2020, decreased by $0.5 million, or 46.3%, to $1.1 million
from $1.5 million in the three months ended May 31, 2019, and decreased $1.1 million, or 28.4%, to $2.6 million for the nine months
ended May 31, 2020 from $3.7 million in the nine months ended May 31, 2019. The decrease
was due to a reduction in marketing expenses driven by a reversal of a $0.3 million accrual recorded in fiscal 2017.
Operations
loss (continuing operations)
As a result of the explanations described
above, the operations loss was $4.5 million for the three months ended May 31, 2020, compared to a net operating loss of $4.3 million
for the three months ended May 31, 2019, and a loss of $12.8 million for the nine months ended May 31, 2020 compared to a loss
of $11.2 million for the nine months ended May 31, 2019. The primary drivers for the increase in operating losses is an increase
in operating expenses.
Other income and expenses
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
May 31, 2020
|
|
|
May 31, 2019
|
|
|
May 31, 2020
|
|
|
May 31, 2019
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
(559,000
|
)
|
|
$
|
(4,345,000
|
)
|
|
$
|
(2,524,000
|
)
|
|
$
|
(6,270,000
|
)
|
Expense related to preferred option exchange
|
|
|
(62,091,000
|
)
|
|
|
-
|
|
|
|
(62,091,000
|
)
|
|
|
-
|
|
Expense related to modification of warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
(22,000
|
)
|
|
|
-
|
|
Loss from debt conversion
|
|
|
(2,842,000
|
)
|
|
|
-
|
|
|
|
(3,500,000
|
)
|
|
|
-
|
|
Inducement loss from debt conversion
|
|
|
(57,000
|
)
|
|
|
(2,273,000
|
)
|
|
|
(624,000
|
)
|
|
|
(3,829,000
|
)
|
Loss on debt extinguishment
|
|
|
(1,592,000
|
)
|
|
|
-
|
|
|
|
(1,592,000
|
)
|
|
|
-
|
|
Gain on change in fair value derivative and warrant liability
|
|
|
6,000
|
|
|
|
4,748,000
|
|
|
|
1,777,000
|
|
|
|
4,748,000
|
|
Gain on convertible note settlement
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,611,000
|
|
Gain on convertible note penalties accrual
|
|
|
-
|
|
|
|
-
|
|
|
|
760,000
|
|
|
|
-
|
|
Total other income (expense)
|
|
$
|
(67,135,000
|
)
|
|
$
|
(1,870,000
|
)
|
|
$
|
(67,816,000
|
)
|
|
$
|
(2,740,000
|
)
|
Interest
expense represents cash interest paid and non-cash expense resulting from the amortization of our note discount and
deferred financing fees on our convertible notes payable. Interest expense decreased $3.8 million, or 87.1%, to $0.5 million and
decreased $3.7 million, or 59.7%, to $2.5 million for the three and nine months ended May 31, 2020, respectively, from the prior
year periods. The changes are due to differences in the amortization of the different series of convertible notes outstanding.
Expense related to preferred options
represents a non-recurring charge reflecting the fair value estimate of the preferred share options issued to our founders
that were deemed to be exercisable in January 2020, and became exchangeable for common stock with the amendment to our Articles
of Incorporation by the Board on March 25, 2020. See also Note 6 for the valuation approach.
Expense
related to modification of warrants represents the difference in fair value for the June 2018 Note Warrants which had
their exercise price reduced from $70 per share to $40 per share in December 2019.
Loss
from debt conversion represents the acceleration of the pro-rated remaining note discount and deferred financing fees
associated with March 2019 Notes, as exchanged in either December 2019 or March 2020, that were either converted or repaid in cash
during the three and nine months ended May 31, 2020.
Inducement
loss represents the difference in fair value on the date of note conversion between the closing market price and the
conversion price per share, and decreased $2.2 million, or 97.5%, and $3.2 million, or 83.7%, for the three and nine months ended
May 31, 2020, respectively from the prior year periods. The change was caused by lower conversion amounts and conversions closer
to market price for the 2020 periods.
Loss
on debt extinguishment represents $0.5 million for the fair value of the common stock issued in exchange for the March
2019 Warrants cancelled in the March 2020 note amendment and exchange described above, and $1.0 million for the acceleration of
the debt discount and deferred financing fees associated with the remaining March 2019 exchange or December 2019 exchange. These
notes were amended in March 2020 and accounted for as debt extinguishment. No such transactions existed for the three and nine
months ended May 31, 2019.
Change
in fair value derivative and warrant liability represents the mark to market of our derivative liabilities created by
the March 2019 Notes beneficial conversion feature and related detachable warrants.
Gain
on convertible note settlement represents the recovery of previously accrued convertible note penalties related to the
June 2018 default. For the three and nine months ended May 31, 2019, we recorded $3.5 million of penalty accrual as a result of
claims by the noteholders as of August 31, 2018 and November 30, 2018. We satisfied this liability with the issuance of $889,000
of additional convertible notes in December 2018 and recorded a penalty recovery of $2,611,000 for the nine months ended May 31,
2019.
Gain
on convertible note penalties accrual represents the recovery of previously accrued convertible note penalties related
to the June 2019 default. For the nine months ended May 31, 2020, we recorded a $1.8 million penalty accrual for litigation damages
and default interest as of August 31, 2019 and November 30, 2019. We settled all note related litigation, as described above and
in Note 5 to the financial statements, in January 2020, which resulted in a gain due to the release of $760,000 for excess damages
accrued liabilities in excess of paid claims.
Loss from continuing operations.
As a result of the explanations described above, the loss from continuing operations was $71.7 million for the three months ended
May 31, 2020, compared to a net operating loss of $6.2 million for the three months ended May 31, 2019, and a loss of $80.7 million
for the nine months ended May 31, 2020 compared to a loss of $14.0 million for the nine months ended May 31, 2019. The increase
is due to the non-recurring charges related to our recapitalization including expenses related to preferred options and convertible
notes.
Discontinued Operations
Results for the discontinued operations by period were as follows:
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
May 31, 2020
|
|
|
May 31, 2019
|
|
|
May 31, 2020
|
|
|
May 31, 2019
|
|
Revenues (gross billings of $0 and $82.3 million less worksite employee payroll cost of $0 million and $69.7 million, respectively for the three months ended; gross billings of $120.0 million and $221.7 million less worksite employee payroll cost of $103.3 million and $187.3 million, respectively for Nine Months ended)
|
|
$
|
-
|
|
|
$
|
12,666,000
|
|
|
$
|
17,138,000
|
|
|
$
|
34,354,000
|
|
Cost of revenue
|
|
|
1,490,000
|
|
|
|
10,125,000
|
|
|
|
17,025,000
|
|
|
|
25,567,000
|
|
Gross profit (loss)
|
|
|
(1,490,000
|
)
|
|
|
2,541,000
|
|
|
|
113,000
|
|
|
|
8,787,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and payroll taxes
|
|
|
-
|
|
|
|
662,000
|
|
|
|
658,000
|
|
|
|
2,414,000
|
|
Commissions
|
|
|
-
|
|
|
|
701,000
|
|
|
|
748,000
|
|
|
|
1,777,000
|
|
Total operating expenses
|
|
|
-
|
|
|
|
1,363,000
|
|
|
|
1,406,000
|
|
|
|
4,191,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations
|
|
$
|
(1,490,000
|
)
|
|
$
|
1,178,000
|
|
|
$
|
(1,293,000
|
)
|
|
$
|
4,596,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain from asset sale
|
|
|
-
|
|
|
|
-
|
|
|
|
15,682,000
|
|
|
|
-
|
|
Total Income from discontinued operations, net of tax
|
|
|
(1,490,000
|
)
|
|
|
1,178,000
|
|
|
|
14,389,000
|
|
|
|
4,596,000
|
|
(Loss)
income from discontinued operations represents the operations for the clients transferred to Vensure effective as of
January 1, 2020, pursuant to the Asset Sale. As such, the operating activities represent zero months and four months of billings,
revenues, cost of revenues and operating expenses for the three and nine months ended May 31, 2020 and billings, revenues, cost
of revenues and operating expenses for the three and nine months ended May 31, 2019. For the three and nine months ended May 31,
2020 we recorded an additional expense of $1.5 million due to a change in the estimated loss reserves required for the
retained workers compensation claims due to higher loss reserve requirements set by our actuary contractors, in part due to the
COVID-19 pandemic. Although claims in this workers compensation pool typically would not qualify for a COVID-19 related liability,
the rate increase for reserve requirements increased and changed our loss estimates. We will continue to evaluate these claims
and the related claims reserve rates in the next fiscal quarter.
Revenues
decreased $12.7 million to $0, and decreased $17.2 million to $17.1 million, for the three and nine months ended May 31, 2020,
compared to the three and nine months ended May 31, 2019. The decrease is consistent with the change in billing months recorded.
Cost
of revenue decreased $8.6 million to $1.5 million and decreased $8.5 million to $17.0 million for the three and nine
months ended May 31, 2020, compared to the three and nine months ended May 31, 2019. The changes reflect the net effect of the
revenue decreases offset by the $1.5 million additional workers compensation reserve accrual recorded for the residual workers
compensation claim liability estimates associated with the existing WSEs being transferred under the Asset Sale.
Gross
profit (loss) changes are the result of the combined gross profit decrease from decreased revenues in addition to the
$1.5 million additional workers compensation expense accrual recorded in the three and nine months ended May 31, 2020.
Operating
expenses represent the salaries and commissions for our employees transferred to Vensure as a result of the
Asset Sale.
Gain
from asset sale of $0 and $15.7 million for the three and nine months ended May 31, 2020, respectively, represents the
net present value of the proceeds received or receivable from the Asset Sale, as reduced by the net financial assets transferred.
The terms of the transaction consisted of a total of $19.2 million of cash proceeds including $9.7 million upon closing and $9.5
million paid over 4 years beginning in April 2020. The gain represents the $19.2 million, reduced by the $1.5 million of financial
assets to be provided, and further reduced by a $1.8 million discount recorded to long term portion of the four-year note receivable.
We believe, based upon our evaluation, that we will be able to utilize existing tax NOL’s to offset any material
tax liabilities generated by the Asset Sale.
Income
(loss) on discontinued operations of represents the gain or loss on discontinued operations for each period, adjusted
for the $15.7 million gain from asset sale for the nine months ended May 31, 2020, as described above.
Net income (loss) increased to net
loss of $73.2 million from a net loss of $5.0 million for the three months ended May 31, 2020 and May 31, 2019, respectively. Net
income (loss) increased to a net loss of $66.3 million from a net loss of $9.4 million for the nine months ended May 31, 2020 and
May 31, 2019, respectively. For the periods reported, net income was impacted primarily by the changes in discontinued operations
and the changes in other expenses related to the convertible note related expenses of approximately $5.0 million for the three
months end, and by the one-time charge for the expense related to the preferred options of $62.1 million.
Liquidity and Capital Resources
As of May 31, 2020, we had cash of $10.8
million and a working capital surplus of $3.4 million. During the nine months ended May 31, 2020, we used approximately $10.6
million of cash from our continuing operations and repaid $1.2 million of convertible notes, after receiving $9.5 million of cash
from the Asset Sale described below, and closed an underwritten public offering, receiving $10.3 million, net of offering costs.
We have incurred recurring losses resulting in an accumulated deficit of $111.2 million as of May 31, 2020. The recurring losses
and cash used in operations raise substantial doubt as to our ability to continue as going concern within one year from issuance
date of the financial statements.
Historically, our principal source of financing has come through
the sale of our common stock and issuance of convertible notes. We successfully completed an IPO on Nasdaq on June 29, 2017, raising
a total of $12 million ($10.9 million net of costs). In June 2018, we completed a private placement of 8% senior secured convertible
notes to institutional investors raising $9 million of gross proceeds ($8.4 million net of costs). In March 2019, we completed
a private placement of senior secured notes to institutional investors raising $3.75 million ($3.3 million net of costs). Between
September 1, 2019 and May 22, 2020 all convertible notes outstanding as of August 31, 2019 were repaid or converted into equity.
On May 26, 2020, we successfully completed an underwritten public offering raising a total of $12 million ($10.3 million net of
costs) and closed an additional $1.35 million ($1.25 million net of costs) between June 1, 2020 and July 7, 2020 pursuant to the
underwriter’s overallotment.
Our plans and expectations for the next 12 months include
raising additional capital to help fund expansion of our operations, including the continued development and support of our
IT and HR platform. We engaged an investment banking firm to assist us in (i) preparing information materials, (ii) advising
us concerning the structure, price and conditions and (iii) organizing the marketing efforts with potential investors in
connection with a financing transaction.
In January 2020, we assigned approximately
88% of our customer contracts in exchange for $9.5 million in cash at closing and received an additional $1.0 million of cash,
net of $0.9 million of cash transferred, and expects to receive an additional $7.5 million over the four years following the transaction
close, subject to certain closing conditions. We transferred $1.6 million of working capital, including $0.9 million of cash,
and the business transfer represented approximately $6.0 million of our annualized gross profit.
We continue to experience
significant growth in the number of WSEs, which we believe will generate additional administrative fees that will
offset the current level of operational cash burn. We retained the high growth business which increased over 100% of
billings and revenue growth. We also retained the rights to monetize the existing pool of WSEs and have begun to roll
out our delivery and scheduling applications to our customers.
Our management believes, but cannot
be certain, that our current cash position, along with its revenue growth and the financing from potential institutional
investors, will be sufficient to fund its operations for at least a year from the date these financials are publicly
available. We expect to benefit from certain tax holiday and loan programs created by the Coronavirus Aid, Relief, and
Economic Security Act in response to the COVID-19 economic crisis. If these sources do not provide the capital necessary to
fund our operations during the next twelve months from the date of issuance of this Report, we may need to curtail certain
aspects of our operations or expansion activities, consider the sale of additional assets, or consider other means of
financing. We can give no assurance that we will be successful in implementing our business plan and obtaining financing on
terms advantageous to us, or that any such additional financing will be available to us. These condensed consolidated
financial statements do not include any adjustments for this uncertainty.
Non-GAAP Financial Measures
In addition to financial measures presented
in accordance with GAAP, we monitor other non-GAAP measures that we use to manage our business, make planning decisions and allocate
resources. These key financial measures provide an additional view of our operational performance over the long term and provide
useful information that we use to maintain and grow our business. The presentation of these non-GAAP financial measures is used
to enhance the understanding of certain aspects of our financial performance. It is not meant to be considered in isolation, superior
to, or as a substitute for the directly comparable financial measures presented in accordance with GAAP.
We report our revenues as gross billings,
net of related direct labor costs, for our EAS clients and revenues without reduction of labor costs for staffing services clients.
For the years ended August 31, 2019 and 2018, we had no revenues associated with staffing services or generated through our technology
services. Gross billings represent billings to our business clients and include WSE gross wages, employer payroll taxes, and workers
compensation premiums, as well as administrative fees for our value-added services and other charges for workforce management support.
Gross billings are a non-GAAP measurement and represent a key operating metric for management along with number of WSEs and number
of clients. Gross billings and the number of active WSEs represent the primary drivers of our business operations. Active WSEs
are defined as employees in our HRIS ecosystem that have provided services for at least one of our client customers for any reported
period. Our primary profitability metrics are gross profit, gross profit per WSE, and gross profit percentage of gross billings.
|
|
May 31,
2020
|
|
|
May 31,
2019
|
|
Active worksite employees (unaudited)
|
|
|
2,700
|
|
|
|
1,600
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of GAAP to Non-GAAP Measure
|
|
Three Months Ended,
|
|
|
Nine Months Ended,
|
|
|
|
May 31, 2020
|
|
|
May 31, 2019
|
|
|
May 31, 2020
|
|
|
May 31, 2019
|
|
Gross Billings
|
|
$
|
14,425,000
|
|
|
$
|
11,894,000
|
|
|
$
|
47,028,000
|
|
|
$
|
25,940,000
|
|
Less: Adjustment to gross billings
|
|
|
12,411,000
|
|
|
|
10,256,000
|
|
|
|
40,253,000
|
|
|
|
22,282,000
|
|
Revenues
|
|
$
|
2,014,000
|
|
|
$
|
1,638,000
|
|
|
$
|
6,775,000
|
|
|
$
|
3,658,000
|
|
Non-GAAP Adjusted Net Income
We incurred significant non-recurring expenses
during the quarter ended May 31, 2020 of approximately $67.1 million related to the combined expenses of the preferred option expense
and the recapitalization charges related to our convertible notes that were fully converted as of May 31, 2020. The expenses recorded
are highly dependent on the input variables used for the fair value estimates for the valuation of the preferred options and the
derivative instruments consisting of the value of the detachable warrants and the value of the beneficial conversion features embedded
in the convertible notes. During the quarter ended May 31, 2020, we eliminated all of our convertible notes and related derivative
liabilities. Significantly all of the expense related to these “below the line” non-recurring items recorded in other
expenses that were related to our recapitalization efforts and as such resulted in a corresponding significant increase to additional
paid in capital, for a negligible impact to our net equity position. We believe that providing an adjusted net income figure excluding
the May 31, 2020 quarter non-recurring items is meaningful to our investors.
For the three months ended May 31, 2020,
excluding those non-recurring items recorded in other expenses totaling $67.1 million, our adjusted net loss for the three months
ended May 31, 2020 was $6.1 million, consisting of a adjusted continuing operating loss (excluding non-recurring items) of $4.6
million, and a loss from discontinued operations of $1.5 million.
For the nine months ended May 31, 2020,
excluding the $67.1 million of non-recurring other expense described above, our adjusted net income was $0.8 million consisting
of an adjusted continuing operating loss (excluding non-recurring items) of $13.6 million and a gain on discontinued operations
of $14.4 million.
Material Commitments
We do not have any contractual obligations
for ongoing capital expenditures at this time. We do, however, purchase equipment and software necessary to conduct our operations
on an as needed basis.
Off-Balance Sheet Arrangements
We did not have during the periods presented,
and we do not currently have, any off-balance sheet arrangements.
Contingencies
Certain conditions may exist as of the
date the financial statements are issued, which may result in a loss to the Company, but which will be resolved only when one or
more future events occur or fail to occur. Our management, in consultation with our legal counsel as appropriate, assesses such
contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related
to legal proceedings that are pending against us or unasserted claims that may result in such proceedings, we, in consultation
with legal counsel, evaluate the perceived merits of any legal proceedings or unasserted claims, as well as the perceived merits
of the amount of relief sought or expected to be sought therein. If the assessment of a contingency indicates it is probable that
a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability is accrued on
our financial statements. If the assessment indicates a potentially material loss contingency is not probable, but is reasonably
possible, or is probable, but cannot be estimated, then the nature of the contingent liability, together with an estimate of the
range of possible loss, if determinable and material, is disclosed. Loss contingencies considered remote are generally not disclosed
unless they involve guarantees, in which case the guarantees are disclosed.
New and Recently Adopted Accounting
Standards
For a listing of our new and recently adopted
accounting standards, see Note 2, Summary of significant accounting policies, of the Notes to the Condensed Consolidated Financial
Statements in “Part I, Item 1. Condensed Consolidated Financial Statements (unaudited)” of this Report.